Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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................................................................Price History ....................... 50 Figure 27: Victoria ......................................... 28 Figure 8: Outlet Representation by Service ...................................................... 4 Figure 2: 1996 Average Prices/Margins .................... 71 MJ ERVIN & ASSOCIATES i .............Selected Centres ................Price History........................................................................... 33 Figure 13: Monthly Gross Marketing Margins........ Pump Price (nominal ¢/litre)................... 45 Figure 22: Petroleum Gross Product Margins .......................................................................................................Price History......... 57 Figure 31: Winnipeg ........................................................................ 24 Figure 5: Canadian Retail Outlet Population ....................................................... 16 Figure 3: 1996 Average Regular Gasoline Margins (56...Selected Goods & Services ...................................................................................................................................................................Price History.......................................................................... 25 Figure 7: Outlet Representation by Mode................................ 43 Figure 20: Ex-Tax Pump Price Elements ........................................................ 36 Figure 17: Study Market Methodology ................................................................................................................................ 66 Figure 35: Saint John NB ............................................................... 49 Figure 26: Outlet Revenues......... Gross Product Margin .. 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)......................Price History ...............Price History....... 56 Figure 30: Regina ................................................................Price History .........................................................................................tax..... 58 Figure 32: Toronto .........1988-1995 ........... 35 Figure 16: Monthly Demand vs........................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ...........8¢ Pump Price) .......................................................................................................................... 34 Figure 15: Monthly Rack Prices: Selected Markets ................ 47 Figure 24: Outlet Volume vs.................. 30 Figure 10: CPI Index Comparison . 44 Figure 21: Gross Marketing Margin Elements ................................ 53 Figure 28: Vancouver ....................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ..........................List of Figures Figure 1: Pump Price / Margin Model................................................................................ 46 Figure 23: Average Annual Throughput per Outlet....................Regional & Urban Groupings.................. ex-tax elements ..................................................................... 40 Figure 18: 1995 Average "Blended" Pump Price ............................................................................................................Price History ..... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category.......Price History .............. Income............... 62 Figure 33: Ottawa ..................... 54 Figure 29: Calgary ............. Costs.................................................................... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ........... 48 Figure 25: Outlet / Volume Relationship .................................. 42 Figure 19: Pump Price ........................................ 69 Figure 36: Halifax ..........Price History.........................................................................Regular Unleaded .................................................................Price History .................................. 70 Figure 37: Charlottetown ................................................................................................................................................. 24 Figure 6: 1995 Retail Outlets by Province ......................................... 63 Figure 34: Montreal ........

................................................................................. 1996 .................................................................................List of Tables Table 1: Downstream Sales Channels ...................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue...................... 13 Table 2: Taxes on Regular Gasoline on December 31................. 51 MJ ERVIN & ASSOCIATES ii ................................ 15 Table 3: Selected Study Markets ............

Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada. rack.5 ¢ 0. This study. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. represented by crude. each with unique MJ ERVIN & ASSOCIATES iii . Natural Resources Canada (NRCan). The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold.2 ¢ 24.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. 1996 Average Prices and Margins . together with a separate review of the refining sector. and a foundation for effective policy development.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. and the Canadian Petroleum Products Institute (CPPI). the Canadian retail marketing sector realized an average gross product margin of 3. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.3 ¢ 28. This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. These prices are determined in a competitive marketplace. dealer income.8 ¢ TAX 28. supplier costs and profitability. Price competition occurs at three distinct levels in this industry.4 ¢ 19.5 cents per litre on the sale of regular gasoline in a typical major urban market. and ex-tax pump prices.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.1 ¢ 5.

ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. are examples of ways in which outlet petroleum sales are augmented by other revenues. and declined by 10 cents per litre measured in constant dollars. The resultant margins are therefore a reflection of the state of product supply. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. Dealers have a variety of relationships with their supplier. From 1986 to 1995. well over half of all outlets in Canada operate as lessees or independents.dynamics. nine of the past ten years. While each of these marketing channels operates in a competitive environment. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. compared to about 22. this study focuses on the retail gasoline sector. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). due to its prominence in the public and media domain. and the traditional automotive service bay. Approximately 16.000 in 1989. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. Convenience store. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure.500 retail outlets were in operation in Canada in 1995. car wash. demand and other competitive factors existing at the time. which potentially allow for reduced margins at the gasoline pump. and accordingly.

Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . MJ ERVIN & ASSOCIATES v .The “tax-included” nominal pump price increased over this same period. as a consequence of refinery plant rationalization (closures) and a modest demand increase.crude) 5¢ Marketing Margin (retail . As a result of these trends. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. This has both resulted in. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. however. and has been a result of several factors including: • • • improved refinery utilization and efficiency. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. From 1991 to 1996. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.

from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. That such a relationship should exist was not surprising. This provided for market-bymarket and regional comparisons of key competitiveness indicators. although this study provides an independent confirmation of this. With the participation of several CPPI member companies. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. several “outside variables” (product taxes. This was integrated with selected NRCan price data. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. When petroleum gross product margins were compared to their corresponding outlet throughputs. to derive 1995 average petroleum gross product margins for each of the 19 markets. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. and one by one. rural markets. but also had significantly higher throughputs per outlet. A wide range of petroleum gross product margins were evident. MJ ERVIN & ASSOCIATES vi . were selected for a detailed review of outlet economics. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. wholesale product cost and freight charges) were isolated from the pump price. 19 markets representing a broad range of conditions.Comparison of Canada. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. With few exceptions.

brand advertising. head office and regional office overheads.962 R2 = 0.• Smaller markets performed as competitively as larger centres. of which gross product margin and throughput are only two of several factors.6624 1.000. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000.000.000 6. This study showed that an average outlet net revenue in the 19-market study group was about $70. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue.000. supplier profit: after the above costs are allocated. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. and his personal labour investment.000 3.000 Volume (litres) 4.6634Ln(x) + 76. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii . car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. smaller markets. and/or distributed to shareholders. Consequently. corporate charity. These costs would include salaries of marketing representatives and management. and in major vs. etc. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet.000.000. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. sales processing. revenues from ancillary operations (eg: convenience store.000 5.. not poor competition.000. the residual revenue is available as profit to be re-invested into retail operations.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. which reflects his investment in the outlet.000 2. an additional goal of this study was to undertake a comparison of outlet profitabilities.

1. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000) $(100.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . The Canadian retail petroleum products industry. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. suppliers likely incurred a net loss on outlet operations in 1995. Average Outlet Income (before marketing overhead costs) BC/PR $300.000) $(350. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. respectively. were insufficient to cover outlet costs.000 vs.000) $(300.000) $(150. $61. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. by all objective measures available to this study. and that petroleum sales revenues alone.000 $200.000) $(250.$154. Although an objective measure of competitiveness is elusive.000 per year.000 $50.000) $(200. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets .000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. after allowing for estimated dealer profit and supplier overhead.000 $150. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers.000 $250. for which this study had no specific data. distant outlets are clearly higher than those associated with concentrated urban markets. at 1995 prices.market study group.000 $100. Despite this difference.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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in the long term these fluctuations are likely more reflective of market restorations. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. had petroleum margins which were commensurate with average outlet throughput for that market. Also. but to increases in underlying rack prices. based upon an assumed posted rack price. Both the downward trend in margins. regardless of size. this industry sector would have realized profits of unprecedented proportions. Thus. virtually all of the 19 study markets exhibited similar levels of competition. Industry profitability is extremely sensitive to very small changes in pump price. 7. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. That such a relationship should exist was not surprising. Nevertheless. most markets. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). crude costs. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. and the associated industry initiatives which are ongoing in nature. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. despite the predisposition of many observers to use them as such. these findings clearly show that pump price increases are ultimately linked not to increased profits. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. although this study provides comprehensive evidence of this. 8. serve as perhaps the most significant indicators of competitiveness in the downstream industry. When these margins were compared to their corresponding outlet throughputs. if Canadian average pump prices were only one cent higher than they were in 1995. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. A wide range of petroleum gross product margins were evident within the 19market study group. not excessive profits. When plotted against the margin-volume model.• • • improving production efficiency through refinery plant rationalizations (closures). assuming all other costs were unchanged. While these economics might appear to place this industry in a position of poor viability. and in turn. Outlet throughput is a key determinant of inter-market pump price differences. Also. Thus. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . Thus. Indeed. most outlets used in the 19-market study represent major integrated oil companies.

• The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. it would seem that if local government in smaller markets were interested in lowering pump prices. The loss of employment represented by a station closure may be of some concern to smaller communities. 9. and this study showed that gasoline prices were no exception. there are three points to consider: • • In very small markets. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). The costs of most consumer goods in smaller. in order to build upon the findings in this study towards a full understanding of the dynamics at work. which could actually inhibit competition. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. more isolated markets are generally higher than in larger centres. which should.product margins than larger markets. reduce pump prices. Smaller.5 million fewer litres of gasoline than a group A (major centre) station. poor outlet throughputs were generally the predominant factor. In suggesting this approach however. average pump prices were relatively high. other factors exist which contribute to relatively high margins and prices. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. the solution would be to encourage some dealers to exit the market. This created some economic pressure to sell product at a higher pump price. reducing the number of outlets may also reduce the number of competitors. • • At first glance. according to the margin-volume model. While competitiveness in most smaller markets was shown to be as active as in larger centres. thereby improving petroleum volumes and ancillary revenues at the remaining sites. A full-serve retail gasoline outlet typically employs 3-5 staff. MJ ERVIN & ASSOCIATES xiii . This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. isolated markets face particular challenges: although found to be highly competitive.

direct regulatory interventions may have an adverse effect on competitiveness. car wash. that where a healthy competitive climate exists. is well beyond the scope of this study. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. and in turn. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. is viewed as an agency which exists to the benefit of industry and consumer alike. and the perceived effect on their markets. is both the cause and consequence of increased activity in ancillary operations. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. Convenience store. The federal Competition Bureau for example. Charlottetown. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. does not appear to benefit in consumer terms. depressed petroleum revenues. The historical record is clear however: since deregulating pump prices. and the traditional automotive service bay. the degree of price competition in the retail petroleum has in effect. This competition then. As these findings show. Also. possibly to the detriment of the consumer. This study proposes rather. under the current PEI regulatory structure. many national and local environmental regulations exist for good cause. 11. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). and as such. has seen a decline in pump prices relative to other Canadian markets. and likely others in Nova Scotia. characterized by narrow product margins and relatively flat pump prices. MJ ERVIN & ASSOCIATES xiv . Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. as it does in the Canadian petroleum marketing sector. will likely preserve a highly competitive petroleum market. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. sometimes below that of outlet operating costs. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22).10. the Halifax market. are an acceptable limitation on pure competition (Finding 8). as marketers find even more innovative ways to attract market share. Retail ancillary operations are a critical element of petroleum price competition.

• • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Develop cooperative industry research into marketing sector competitiveness issues. This should be in the form of a quarterly summary of price trends and related measurements. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. not inhibit. along the lines of the model used in this study. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. using Canadian and foreign selected markets. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and the converse image held in much of the public domain. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. • • MJ ERVIN & ASSOCIATES xv . Public perception measurement. petroleum marketing competitiveness. and the nature of competitiveness influences. using Canadian and foreign selected markets. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Improve public understanding and awareness of competition in the petroleum marketing sector. A regular comprehensive competitiveness evaluation. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. margins and competitiveness factors.1. 2. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. in a simple format designed for consumers and legislators. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector.

the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. • * * * Better understanding of this industry. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. consumers. and issues/opportunities facing such markets. using Canadian and foreign selected markets. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. and in particular. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. by industry. MJ ERVIN & ASSOCIATES xvi . and regulators alike.

and in comparison to the Canadian national average and nearby USA markets”. to name a few. and in the process.to draw comparisons with nearby USA markets.to determine the key factors which drive competitiveness in specific markets.. competitive pressures from US and offshore refiners. face a number of challenges: a poor public image.to help the industry cope and to enhance competitiveness. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. and .. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector. which comprise the “downstream” oil industry. and a challenging array of potential environmental initiatives. leading to more effective policies and reduced uncertainty for future investment. A working group represented by Natural Resources Canada (NRCan)... the Canadian Petroleum Products Institute (CPPI). or even communities within the same region. .... and regional differences which face the petroleum products retail industry. including a regional... and Industry Canada was convened to undertake this project. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. or petroleum marketing portion of the study. In 1995.Introduction Background Canada’s petroleum refining and marketing sectors. and that issues and challenges be identified so that conclusions and recommendations can be made “. Specific purposes of this study would be: • • • • “.” MJ ERVIN & ASSOCIATES 1 . This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. region by region across Canada.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made.to provide a sound database upon which more effective policy decisions can be made. The SCF laid the foundation for supplementary studies.. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump. Project Objectives The working group established as the primary objective of this study “.. and MJ Ervin & Associates was selected to undertake the “rack to retail”.to better understand the competitive opportunities and challenges.to analyze the rack to retail market and the market structure for refined petroleum products.. .

an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. and a foundation for effective policy development.The study meets these objectives. Supporting data to these charts can be found in Appendix II. and in order to provide insights into the range of competitive dynamics that can exist. • Part E: Conclusions and Recommendations summarizes the study findings and. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. The study does provide comparisons with US markets on a national level of detail. undertaken as part of this project to: • make a more detailed examination of price. Many of the findings in this report are presented in graphical form. through a multi-faceted approach. Specific comparisons of specific Canadian and US consumer markets were not made. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . presents conclusions and recommendations which arise from the study findings. from which some important findings are made. Findings are stated in bold and are summarized in part E of this report. or which have a specific meaning in the context of this report. It also relates consumer demand patterns to pump price fluctuations. and the effect of competitiveness on each subsector. margins and demand patterns over the past several years. due to the considerable data gathering difficulties that such an approach would entail. Ultimately. Unless otherwise stated. Part C: Historical Trend Analysis provides an overview of prices. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Part D: Selected Market Study presents the findings of a diverse 19-market study. in Appendix I. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader.

Environment Canada. NRCan. • • Several organizations participated in two key review sessions. The Canadian Petroleum Products Institute. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study.. assisted in securing the support and participation of member companies in the selected markets phase of the study. and their 481 retail associates whose outlet data was used in our analysis. chaired the steering committee. These included: Canadian Tire Petroleum. including Ultramar Canada.• Industry Canada. Consumers Association of Canada. Petro-Canada. CPPI. facilitated some of the data gathering needs of this study. Shell Canada.. for their assistance. Petro-Canada. and Industry Canada.. MJ ERVIN & ASSOCIATES 3 . through Bob Clapp. and Shell Canada. Imperial Oil Ltd. Finally.. Natural Resources Canada. Suncor Inc. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). Ontario Ministry of Environment and Energy. and also participated in the steering committee. and provided critical guidance and feedback at several key stages in the process. Ministère des ressources naturelles du Québec. We gratefully acknowledge these companies. through Maureen Monaghan and Huguette Montcalm. Suncor Inc.

public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. These relationships can be modeled. And. texture.price . Yet. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. unlike many consumer products. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . as they are in Figure 1. as this study shows. most Canadians relate to this industry in one specific way: as consumers. but simply. principally of motor gasoline. multifaceted industry. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. It is this particular feature of petroleum products . or taste. In fact. the particular quality of gasoline which is of most interest to consumers is not its colour.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. and serves to explain several factors that together determine retail gasoline prices at any given time. its price. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry.which is used by many groups and individuals to assess the competitiveness of the petroleum industry.

or margin . Gross margin is simply the difference between two price points. From an industry perspective. So defined. gross margin represents revenue only.Many of the terms introduced and explained in this section are used extensively throughout this study. these stakeholder revenues are derived from the revenue from the retail sale. Before examining each of the model elements. consumer perspective. MJ ERVIN & ASSOCIATES 5 . “competitive” may be synonymous with “viable”.from the total pump revenue. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. Ultimately however. each essentially taking a share1 . (implying that the stated margin represents net income or “profit”). this study examines competitiveness from the latter. is more likely to equate the term with “value for money”. and in fact inextricably related. A consumer however. While both perspectives are valid. this study’s use of the term relates to gross margin. an understanding of the term itself is necessary. While this term is often associated with the phrase “profit margin”. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. evaluating competitiveness is therefore a partly subjective process. margins are squeezed or expanded accordingly. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. any operating expenses must then be considered before making any determination of profits. objective measurement for competitiveness. it is important to define the term “margin”. Each margin is quantified by its defining prices. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product).

it can frustrate communication and obscure analysis.. To achieve this. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. or in other words. as competitors seek to attract market share through lower prices. reducing costs. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. is the only real option in the long term. a universally acceptable definition of competitiveness is elusive. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . improving efficiencies. if market conditions allow a sufficient number of players to remain profitably engaged. Competition can only be sustained therefore.” “. More importantly.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. and the entry of new competitors and new ideas. Accordingly. competitors can either restore higher prices or reduce costs.” Price Competition in the Oil Industry In order to assess competitiveness. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). An effective functioning of markets also permits smaller competitors to expand if they meet the test. The actions by business rivals place an upper limit on the prices a firm can charge for its products. Price competition. Technological change and innovation are the large levers of competition in industry. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. represents a process by which prices are set. provide some means for comparing the type and to some extent. the result of price competition is reduced profit. and unless care is taken to use the word precisely. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. Since a competitive market effectively limits the price option. Simply put. 1986: “Competition may mean very different things to different people.. Conditions for a competitive market can be deemed to exist when: • • more than one. the degree of competition within a market. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. one must ask how marketers compete. Inevitably.Unlike many business or economic concepts. in the sense in which it is something in the public interest. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. in order to maintain some level of brand variety. and ideally many entities offer the same or similar products (brand variety). this usually requires a reasonable number of competitors.

A refiner in Toronto may well compete with a refiner in Buffalo. Irving. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. Nevertheless. most Canadians relate more in terms of retail gasoline marketing. is false. some organizations have operations in two or more of these markets. • Thus described. Price. so a brief description of these. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. whose main 1 E. and in retail markets. which in turn defines the margins. MJ ERVIN & ASSOCIATES 7 . Given the commodity nature of petroleum products. the raw material from which gasoline is made. 1960) 2 Although distinct. the geographic scale of competition is an important consideration. Place. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. In fact.. Within the broad context of the oil industry. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. Ill.the variables at their disposal. whose main activity is the exploration and development of crude oil. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. 1971). and the downstream industry. commonly known as the “marketing mix”1. in rack markets.: Richard D. and are beyond the scope of this study. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. particularly in the crude (upstream) industry and refiner sector. New York. p. (Homewood. or four P’s: Product.44 (1st Dec. the “oil industry” consists of two distinct industries: the upstream industry. Jerome McCarthy. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. 4th Ed. and Promotion. and are generally known as integrated oil companies. Basic Marketing: A Managerial Approach. The dynamics of upstream and refiner competition are major studies in themselves. and as will become more evident in this study. It is also important to stress that the market ultimately sets rack and retail pump prices. the most effective of these as a competitive tool is price. The converse notion that the industry establishes a “should be” margin. competition in the crude and rack markets deserves some mention. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. which in turn defines a proper market price.

While this study focuses on the downstream industry (and in particular. consequently. and in the open market structure that exists in Canada. its marketing operations). gasoline grade. implying that it fluctuates. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. as a minor contributor to the world crude supply. Within the scope of this study. Canadian producers are known as “price takers” rather than “price setters” of crude prices. Although this industry is not the focus of this study. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. MJ ERVIN & ASSOCIATES 8 . drilling. and transportation of crude oil to the refinery plant. rather than a fixed value. Canadian producers have virtually no influence over world crude prices. Canadian producers must compete to sell their production to refiners. and refinery production methods. due to variables such as crude quality. which it does on a continuous basis. Crude oil is a commodity which is traded in a global marketplace. alongside major producing countries such as Saudi Arabia. from the exploration for potential crude or gas reserves. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. which finds and produces crude oil . and the delivery and sale of these products to the consumer. production. it is important to examine its relationship with its neighboring downstream industry. our crude prices rise and fall according to price benchmarks established far beyond our own shores. in several commodities trading centres around the world. which gives an accurate portrayal of month-to-month crude price fluctuations.activity is the refining of crude oil into petroleum products. In providing historical comparisons of crude to rack/pump prices. it is probably sufficient to say that. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. that is to say.the raw material from which gasoline is made. The upstream industry’s crude price is represented in Figure 1 as elastic. Infrastructure The upstream oil industry encompasses a broad range of operations.

manufactures a range of refined petroleum products including gasolines. buy refined products from the refiner and sell them to the end-use customer. As a general measure: Finding 2: 1996 average crude price. which in oil producing provinces such as Alberta. put simply. its predominant feature is the plant facility which. who manufacture petroleum products from crude oil.While some suggest that the price of gasoline should rise and fall exactly with the crude price. as a factor of the regular gasoline retail pump price. day-to-day plant operations are cost-intensive. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. As is typical of many manufacturing organizations. diesel. personnel. and hopefully realize some production. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. drill for. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. From this revenue. The focus of this study is on the marketing sector of the downstream petroleum industry. and some attention to the refiner sector is therefore given here. and pay out royalties to the resource owner. in the petroleum sector. A modern refinery is a sophisticated work of engineering. and lubricants. is called the refinery. This sector acquires crude oil. maintenance. and from this feedstock. crude is only one of several factors that influence pump prices. In addition. and numerous safety and environmental safeguards.1 cents per litre. MJ ERVIN & ASSOCIATES 9 . is the provincial government. or roughly 34 percent of the pump price. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. involving energy. heating fuels. oil producers must explore for potential reserves. and marketers who. was 19.

1 Dealer Price is not included here. indicative of a competitive wholesale rack market. If for example. contract price . the gross refiner margin is elastic. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. This margin provides for plant operating costs as described above. confidential terms between the seller and specific buyers. they use rack price as their basis. the relative competitive strength of any given rack market is difficult to assess. representing major Canadian population centres. In simple terms. many of which do not have integral refineries. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. only rack price information is readily available in the public domain. which can be broadly categorized as follows1: • • • rack price . less the price at which it bought its raw material2 (rack price minus crude price). since the market-driven rack price provides an objective. Although contract and transfer prices are distinct from rack price. For a competitive rack market to exist. there would be little or no market-driven competitiveness in the refiner sector. Of these three refiner prices. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. which may cause Gross Refiner Margin to be slightly overstated. The existence of rack price in a given market is not of itself. not the refiner sector. the gross refiner margin is the price at which the refiner sells its refined product. some clear competitiveness indicators exist. as this price point exists within the marketing sector. On a national basis however. and a return on the considerable capital investment in the plant facility. While refineries are always rack price points. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. refiners sell their product under a variety of arrangements. Since both crude and rack prices fluctuate according to market forces. Contract and transfer prices are not openly shared. 2 MJ ERVIN & ASSOCIATES 10 . which provides an independent and objective determination of rack-based gross refiner margin. In fact the refiner typically pays a higher price than the benchmark crude price. In fact. being squeezed or expanded between these two price points.this is the “internal” price charged by a refiner to the marketing arm of the same company. but with no material effect upon the Gross Product Margin derivation. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. as they relate to negotiated. reflecting the cost of transporting the crude from the producing region to the refinery plant. transfer price . Wholesale volume data is not readily available on a market-specific basis. and accordingly.the price charged for immediate supply on an “as available” basis. external measurement of the current market value of a particular petroleum product.Price/Margin Model Elements For simplicity.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. this model only uses the benchmark crude value. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. For simplicity.

or close to. or transfer price. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. many US and European refineries are in practice. who compete for a share of this demand.000 km) for overland truck transport. wholesale refined product is bought and sold across very large distances. to so-called “independent” petroleum marketers. As shown in Figure 15 (page 35). but at the expense of marketing income. for example. the question of the internal selling price. In practical terms. to major industrial consumers. petrochemical producers. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). would produce better than expected refiner income. and in the case of gasoline. but where pipeline or marine fuel terminal facilities exist. market-driven Rack (wholesale) pricing of petroleum products. but with their US and European counterparts. potential sources of wholesale product supply for most Canadian non-refiner marketers. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. In practice. this limits a marketer to a relatively short range (perhaps 1.for example. in order to maintain realistic accountabilities within each of the two sub-sectors. even overseas. MJ ERVIN & ASSOCIATES 11 . due to the relatively small transportation cost. In examining the structure of the Canadian refiner sector. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. and which supply petroleum to about one-third of all retail outlets in Canada1. Integrated Refiner-Marketers In Canada. from any one of several regional refiners. In these cases of so-called “integrated” refiner-marketers. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. Canadian refiners must therefore be price competitive not only with each other. 1 Based on Octane Magazine Retail Outlet Survey data. market-driven rack prices. most refiners also participate in the marketing and retailing of petroleum products. arises. integrated refiner-marketers establish transfer prices at. as there is no obvious market mechanism to regulate its setting.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . The mechanisms that drive rack prices are more fully discussed on page 36. who themselves do not refine petroleum products.

as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. including mining. farming. or in the case of cardlock facilities. trucking. Within this industry sector.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. • • MJ ERVIN & ASSOCIATES 12 . each with its own distinct infrastructure. Retail Sales to the domestic motorist. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. For this reason. It is this sector which has direct contact with the petroleum consumer and it is this sector. which “sets” the retail price of gasoline. media and regulatory attention. Wholesale Sales to a wide variety of customers. in the minds of many consumers. and aviation. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. home heating. the most recognized element of the downstream oil industry. and purchase at or near the established rack price. principally into commercial trucking operators’ vehicles. product is sold from a central facility. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. as a popular and relevant “window” on the petroleum marketing sector. Marketing operations within this sector can be broadly classified into three elements. gasoline price and competitiveness issues attract considerable public. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. and who essentially deal directly with the refiner.

Sales of aviation fuels at major and secondary airports across Canada. Sales to commercial and industrial accounts by the wholesale marketing sector.300 bulk sales outlets in Canada. such as product transport and/or storage. according to the contractual relationship between the supplier and the dealer. Sales to non-refiner petroleum marketers. typically at the “rack point”. There are over 1. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. heating fuel delivery is an integral part of a bulk sales outlet. one final element of the pump price model must be reviewed. in smaller centres. as principal elements of petroleum marketing operations. using delivery tank trucks. and regular gasoline in particular.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. usually involving some aspect of the marketing sector infrastructure. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Before examining this sector in detail. Sales of petroleum products through bulk sales outlets. Sales to major industrial accounts. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. and usually supply customers by delivery to the customer’s own storage tank. to the aviation fuel consumer. which is generally less than the rack price. MJ ERVIN & ASSOCIATES 13 .500 retail gasoline outlets in Canada. Direct sales generally do not involve any marketing sector infrastructure. Sales of home heating fuels to residential furnace oil customers. There are over 850 cardlock outlets in Canada. as discussed. In major centres dedicated Home Heat centres provide this service. often delivered by pipeline or ship/barge. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. at a negotiated contract price. to the motorist consumer. for example. which primarily serve long-disttance truckers and commercial delivery and haulage operators. Retail outlets are operated in a variety of modes. Sales of petroleum products (principally gasoline) through retail gasoline outlets. There are about 16. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales to spot buyers at posted rack price. by delivery tank truck. These outlets usually have considerable inventory capacity.

typically made up of: • • • • a ten cent per litre federal excise tax. The petroleum industry acts as a collector of these taxes. tax content does fluctuate somewhat with pump price changes.2 cent (0. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. PST). provincial sales tax.3 in Quebec) drop in the tax content. Table 2 shows the provincial tax content for retail gasoline. If the pump price decreases for example.6 cents per litre (Canada 1996 10-city average). As part C of this study shows. which amount to 28. municipal taxes. and seven percent GST. would include a roughly 0. stable amount. the tax content of retail gasoline in Canada has increased steadily over several years. in a small number of markets. 1 Due to the application of GST (and in Quebec. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. or roughly 50 per cent of the pump price. MJ ERVIN & ASSOCIATES 14 . A three-cent drop in pump price.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. regardless of market conditions. for example. the tax content of the petroleum price is essentially a pre-determined.

MJ ERVIN & ASSOCIATES 15 .0 10.0 28.5 14.5 12.0 10.8 note 1 note 2 An additional tax of 1.0 10.1 32.0 10.2 24.5 Total Tax 24.0 3.3 27.0 10.3 Federal Excise Tax 10.2 24.3 20.0 27.2 cent per litre pump tax.6 22.Table 2: Taxes on Regular Gasoline on December 31.6 3.5% sales tax applied to the GST-inclusive pump price.0 10.8 4. plus a 6.0 10.5 3.0 11.5 cents and 4.6 3.0 10.0 9.0 10.0 cents is charged in the greater Victoria and Vancouver areas respectively.0 14.0 4.0 10.6 3.0 10.4 3.6 25.3 10.0 28.0 15.7 18.0 10.7 30.1 25.2 10. An additional pump tax of 1.6 3.9 3.7 13.5 6.7 3.0 3.5 cents was introduced in the Montreal and surrounding area in 1996. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 16. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave. All Quebec gasoline sales are subject to a 15. Provincial Tax 11.0 GST content (7% of pump) 3.

and the retail gasoline sub-sector in particular. It also provides an overview of the industry in terms of several infrastructure parameters.3 cents per litre. namely the dealer’s costs and income. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56.2 ¢ 24. MJ ERVIN & ASSOCIATES 16 .3 percent of the average regular gasoline posted pump price. and ancillary operations.3 ¢ 28.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.4 ¢ 19. 3. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average). Figure 2: 1996 Average Prices/Margins . the brand supplier’s costs. based on regular unleaded gasoline.1 cents per litre. operating modes.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28. was available for product marketing operations.8 ¢ TAX 28.5 cents per litre (after freight cost). to derive a representative value for regular gasoline gross product margin in Canada. This 1 Prices and margins reflect a Canadian 10 city average.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. including retail outlet distribution.6 cents per litre. or 50. Refiner operations realized 5. The residual. and potentially.5 ¢ 0.1 ¢ 5. this section provides a view of the Canadian petroleum marketing sector. some profit return for the shareholder. or 34 percent of the pump price. Upstream operations realized 19. or 9 percent.

and is then transported to the retail outlet. Bloomberg rack price values were used as the assumed wholesale price.5 cents per litre. In referring to marketing margins and product margins. is the second of two elements of the downstream oil industry. and it is depicted in Figure 1 as a fixed cost element.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. the finished product (gasoline. as part C will describe. As the product leaves the refinery plant. it falls into the domain of the marketing sector. is defined by the marketdriven price points of ex-tax pump price. three key findings can be stated: Finding 4: Finding 5: In 1996.3 cents per litre. See page 10 for further explanation. Freight MJ ERVIN & ASSOCIATES 17 . In 1996. and rack price. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. which in the case of retail gasoline. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. Although many petroleum marketers conduct their own freight operations. and is often out-sourced to third-party common carriers. this is seen as a “non-core” business. Based on the 1996 data. The marketing sector then. for example) is sold/transferred at the current rack or transfer price. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. or “rack to retail” margin. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. In 1996.3 percent of the average urban price of regular gasoline in Canada. is usually the gas station. petroleum taxes accounted for 50. The gross marketing margin. was 5. was 3. Both refiner and marketing margins have been in decline over the past several years. Freight cost does not typically fluctuate.

Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .5¢ Product Operations Freight 0. • Product sales: Within this domain. which are typically close to a wholesale rack point. but at an average cost of over $200. This is a particularly useful measurement in comparing retail gasoline markets. incur a variety of costs.1¢ Tax 28. petroleum marketers. and is therefore a poor comparative tool. storing and dispensing a product such as gasoline adds considerably to the operating cost. as it excludes the “outside variables” of tax. as it represents 80% of all retail gasoline sales. together with gas station dealers. an average gross product margin for regular gasoline in a major Canadian city was 3. rural markets experience higher pump prices than do larger centres. typical of any retail business. Gross product margin is therefore defined as gross marketing margin less freight cost.8¢ Pump Price) Upstream Operations 19.costs are generally less than one-half cent per litre in most major Canadian cities. freight. Unlike most other retail enterprises however. Figure 3: 1996 Average Regular Gasoline Margins (56. As represented in Figure 3. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL).3¢ 3.6¢ Refiner Operations 5. Posted pump price includes all of these variables.5 cents per litre in 1996.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. and upstream/refiner margins.000 per outlet.

or when comparing price levels between markets. etc. 1960) MJ ERVIN & ASSOCIATES 19 . Basic Marketing: A Managerial Approach. Higher octane grades are more expensive than RUL.44 (1st Dec. will ultimately purchase based on price. Simply put. it represents a very small percentage of total retail petroleum sales. In order to measure competitiveness. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector.” or four P’s: Product. Ill. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. one must ask how marketers compete. but in 1995 was typically 5 cents per litre for midgrade. Although revenue from this product is factored into the study market economics in Part D. Irving. commonly known as the “marketing mix2. and accordingly. but most consumers view gasoline as a commodity. a number of factors preclude this type of strategy. 2 E. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity.: Richard D. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Today. Price. marketers compete for the consumer’s choice of transportation energy (for example. and Promotion. A portion of the market certainly responds to this type of competitive strategy. Jerome McCarthy.). RUL prices are therefore most often cited when relating historical price trends. and 9 cents per litre for premium gasoline. Price competition has forced marketers to optimize outlet revenue. competitive strategy of this type focuses heavily on selecting the best place. Place Typically. gasoline). rather than the most places. expanded product/services offerings such as convenience items. Place. This study does not examine such a broad issue however. 1 Diesel is another petroleum product sold at many retail outlets. seasonal blends. The grade differential varies somewhat from city to city. 4th Ed. (Homewood.retail gasoline sales respectively1. additives. marketers have attempted with some success to differentiate their product offerings from other brands. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. marketers compete to be represented in as many and/or the best locations as possible. • Product In the past decade. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. page 24). 1971). as gas stations proliferated. propane vs. and the price difference between these grades and the RUL price is referred to as the grade differential. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content.. p. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. Today.

• • • While examples of all of these indicators are abundantly in evidence. probably due to its relatively high cost. and due to the already slim margins available to marketers. is less clear. their subsector margins. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. In this context.while uniform pump prices are sometimes cited as evidence of industry collusion. due to the largely commodity nature of petroleum product. This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. and therefore “trades” within a relatively narrow price range. gasoline is a commodity. Promotional activity seems to have decreased in the past few years. MJ ERVIN & ASSOCIATES 20 . and more importantly. Examples of promotional competition are: • • • brand identity gasoline discount coupon. free item with purchase or special price item with purchase. price has proven to be the most widely used competitive tool by gasoline marketers.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. volatile pricing manifests itself in the form of a price war (see below).contrary to some public perception. gasoline is viewed by consumers as a commodity uniform in quality and widely available. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. This study presents an extensive historical and comparative analysis of pump prices. volatile prices . low prices and/or margins. Promotion In the gasoline retailing sub-sector. • Price In most markets. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. caused by price competition. At its extreme. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. Examples are: • prominently displayed prices . uniform prices . fluctuating pump prices are a significant indicator of robust competition among marketers. Establishing an objective measurement of price as a competitiveness indicator however. this study examines the dynamics of price competition in considerable detail. Consequently.• • closure of non-viable outlets. As such. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next.

since they too must restore their gross product margins to sustainable levels. obviously at the expense of the supplier margin. and provide to the dealer what is commonly referred to as price support. This is a misconception. facilitated through street price signs. but to competitors. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. its effect is to restore some measure of the dealer margin. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. If the posted price increase is too high. competitors may not follow. The effect of this upon the gross marketing margin is obvious: it is squeezed. since there is no “dealer margin”. Pump prices therefore tend to move uniformly within a very short time. bypassing the higherpriced outlet. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. Finding 7: Price uniformity and price volatility. in an attempt to gain market share. Pump price signs are an ubiquitous feature of the retail gasoline industry. one must adopt the perspectives of both consumers and competing. the relationship between the supplier and dealer is generally as described on page 25. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin.where the ex-tax pump price is equal to. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. competitors will likely match this price. the supplier may temporarily intervene. The other dealer has little choice but to quickly match. Whether through falling pump prices or rising rack prices. the effect on many consumers is immediate: they will drive into that station. or even being squeezed to zero . MJ ERVIN & ASSOCIATES 21 . the wholesale rack price. While this support may take one of several forms. assuming that the rack price is unchanged. Price Support In times of “normal” pump prices. or when prices rise or fall apparently in unison. for example). in order to maintain a reasonable market share. When this occurs. 1 This does not occur at company operated or commission outlets.When pump prices are uniform. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. are indicators of a competitive market. adjacent dealers. To understand the phenomenon of uniform pump prices. In the case of lessee or independent dealers however. or even undercut the competitor’s lower price. If one dealer decides to reduce pump prices (by two cents. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. who then react quickly to the change. or even less than.

These cases have largely involved local dealers and/or isolated incidents. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. In addition. More recently. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. and a brief discussion of this case appears in part D. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. provincial and even municipal levels. While this study does not intend to undertake a detailed review of the effect of the Act.Under the provisions of some price support mechanisms. resulting in 9 convictions. however. 1997 MJ ERVIN & ASSOCIATES 22 . Price maintenance: where a supplier exerts upward influence on prices upon a dealer. the Bureau found that there was no evidence to support these allegations1. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. control over retail pump price effectively reverts to the supplier. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. In addition. which is administered by the federal Competition Bureau (Industry Canada). A review of historical retail pump prices in the Halifax. is beyond this study’s scope. or of direct government intervention in marketing. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. but reverts back to the dealer when the support arrangement is ceased. An examination of the effect of the Competition Act. the petroleum marketing sector has been the subject of several inquiries at federal. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. Following a year-long investigation. There are few current examples of direct government intervention in the pricing of petroleum products. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition.

to some degree. or incentive for.500 retail gasoline outlets across Canada. accounting for roughly 88% of all gasoline demand. particularly in smaller population centres. Many smaller retail owner-operators. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. but exist to meet other important societal needs. Conversely. that is. or inhibiting. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. accounts for about 37% of all refined petroleum demand in Canada. one can cite examples of regulatory obstacles to exit from the retail gasoline market. and consequently. promotes or limits market-driven pump prices. is in part. as outlined above. These regulations clearly exist to the benefit of all. MJ ERVIN & ASSOCIATES 23 . inhibit competition. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. The high cost of building a modern retail gasoline outlet for example. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). So defined. A practice. accounting for 41% of all petroleum demand. in the form of standards for the decommissioning of retail petroleum sites. and at least some of this capital cost is regulatory compliance-driven. creates an obstacle to. entry into an attractive market. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. a competitive climate. It is important to acknowledge that many regulations affecting the retail gasoline industry. or incentive for. sales of gasoline through the roughly 16. it is clear that government policy plays an important role in facilitating. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. for safety and environmental protection. Retail gasoline sales. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. As a product group however. higher pump prices.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. creating a need for higher margins. This issue is discussed more fully in part D. and is the single largest market for gasoline products. exit from an non-viable market. it is the single largest one. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs.

9% Diesel Fuel 22.2% Retail Gasoline 37. Figure 5: Canadian Retail Outlet Population . This study provides an estimate of the actual retail outlet population.7% Light/Heavy FuelOils 14.452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.2% Propane /Butane 2.7% Lube/Grease 1.it has no practical means to enumerate each and every outlet. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.3% Total Sales Volume: 84. as shown in Figure 5.6% Other Gasoline 4.2% Asphalt/Coke 4.2% Other 0.9% PetroChem Feedstocks 5.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 . This survey accounts only for major established retail networks .

and the dealer. who holds initial title to the refined petroleum as it leaves the rack point. as owner of the product. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . Distribution of these outlets by province (Figure 6. Several possible relationships.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. who manages the day-to-day operations at the retail outlet. the retail outlet is owned and operated entirely by the product supplier. using Octane counts only) is roughly equivalent to population densities. The principal dealer and attendants are salaried employees of the supplier. exist between retail dealers and their suppliers. or modes.000 outlets in 1989. There are two main stakeholders involved in the marketing of retail gasoline: the supplier.500 in 1995. to about 16.The estimated number of retail outlets in Canada has declined from 22. The supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. controls the setting of the pump price. as one might expect. and usually owns the brand name seen at the retail outlet. and this is of some importance with respect to the matter of prices and competition in this sector. and all inventory and revenues belong to the supplier. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.

who pays all outlet operating costs.the entire gross product margin accrues to the brand supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. based on pump sales volume. Since the supplier owns the petroleum product at this type of outlet. usually based on cents per litre of petroleum sales. Control of Pump Price Dealer Compensation supplier a commission from the supplier. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . and pays them from his commission revenue. but the outlet operator (“dealer”) is compensated by a commission payment. the supplier retains control of the retail pump price. The dealer in turn hires attendants. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. The “dealer” is in essence. the outlet facilities and petroleum inventory is owned by the supplier. an employee of the supplier supplier supplier typically the dealer.sub-component margins . the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. supplier salary from supplier.

and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. and sells at the posted pump price. the retail facilities are owned by the dealer. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. This Dealer Price. can vary considerably from one supplier to another. MJ ERVIN & ASSOCIATES 27 . The margin between these two prices is the dealer’s gross revenue. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. The dealer pays most or all of the expenses associated with operating the outlet. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. unlike rack or pump prices. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. dealer-established retail price. and in turn resells to the motorist consumer at a higher pump price established by the lessee.product from the supplier at a “Dealer Wholesale” price. This dealer margin is defined as the pump price (ex-tax). since it is predicated on contractual arrangements between the dealer and the supplier. less the Dealer (wholesale) Price charged by the brand supplier. and has control over the retail pump price. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. and means of compensation supplier. The margin between these two prices is the dealer’s gross revenue. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. and sells at the posted pump price. not the supplier.

Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. and fully two-thirds operate as lessees or independents. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. some general figures are mentioned here. 1 Unless the dealer is under a price support arrangement (for instance. Petro-Canada. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. during a price war) as previously described. virtually none of the major integrated outlets are company operated. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. In addition. MJ ERVIN & ASSOCIATES 28 . There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. who themselves establish pump prices. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. The remainder represent one of over 50 different marketer organizations. or Imperial Oil).

feature both a large-area convenience food store and a modern car wash facility. to over five million litres in major markets such as Toronto. These improved outlet throughputs have provided for improved petroleum revenue potential. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. and is a result of. average annual throughputs ranged from under 1 million litres in smaller population centres. Figure 8 depicts the Canadian representation of several key ancillary services.5 million litres. has had a profound effect on the retail gasoline marketing sector. reduced petroleum margins. which in part has led to a reduction in retail product margins. Most ancillary services are operated by the dealer/lessee. In fact. In effect. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . Based on a sampling of outlets surveyed in this study. ancillary service has had the consequence of subsidizing the pump price of gasoline. Many outlets have more than one ancillary offering: many “flagship” outlets for example. Improved outlet revenue from ancillary operations has caused. more fully described in part C. Canadian throughputs have dramatically improved in the past several years . who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. these study findings show that this can vary widely from market to market. The proliferation over the past two decades of ancillary services such as convenience stores and car washes.While an average outlet throughput may be in the order of 2.

mainly using Canada average values. an examination of the specific historical record of gasoline prices is useful. This part examines broad trends in several areas. using a Canada 10city weighted (by provincial demand) average. Since rising prices are common to most consumer goods and services. would be somewhat higher. An “all markets” average.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. and with which the reader should be familiar. particularly around 1990. While some of the presented findings are selfexplanatory. the “Canada average” price reflects an average of urban markets only1. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. Since 1 Data is not regularly collected on smaller markets. As such. as can be seen in part D of this study. when the Persian Gulf War caused crude prices to increase significantly. Regional and market-to-market comparisons are presented in greater detail in part D. This shows that pump prices have increased in nominal terms. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. MJ ERVIN & ASSOCIATES 30 . Unless noted. prices are for regular unleaded (RUL) gasoline. including smaller markets. many utilize terms which are explained in part A.

as in Figure 10. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. When compared to other consumer goods. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. It also depicts the associated margins. In constant dollars. and relative crude cost. ex-tax equivalent prices. rack price. MJ ERVIN & ASSOCIATES 31 . and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. as defined in part A of this study. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). nominal pump prices decreased.1990. Figure 10: CPI Index Comparison . retail pump prices were about 7 cents less in 1995 than they were in 1986. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. When pump prices are reduced by the amount of tax content. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices.

Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. as the next section shows. Margin History While Figure 11 provides an indication of key price trends. the downstream industry operates on a “cost-plus” basis. as might be suggested. Figure 12 shows that industry margins have not been constant over time. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. due to additional market factors which affect pump and rack prices at any given point in time. MJ ERVIN & ASSOCIATES 32 . which in turn. which are defined by the price points. In fact. and have risen slightly since 1994. nor do rack prices exactly follow crude costs. It is important to state that pump price changes do not occur in exact lock-step with rack prices. it simply passes on a fixed cost margin to determine the “correct” pump price. are principally a reflection of changes in the underlying price of crude oil. and the rise in the tax content. and in fact have displayed a declining trend over the past six years. then one might expect margins to be quite constant over time. it is also useful to examine the behavior of margins. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. as Figure 11 shows. If. the presence of these additional market factors have operated to the benefit of consumers. as shown in Figure 12. that is.

A more thorough discussion of specific market factors for these and other centres appears in part D. not weekly or daily data. and has been a result of. this upward trend is not attributable to “downstream” refiner or marketing sector margins. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.crude) 5¢ Marketing Margin (retail . since the chart is based on monthly averages. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. compared to the Canadian average. This shows that on a monthly basis.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . which have both shown a consistent decline throughout the period 1991 to 1996. the gross marketing margin can fluctuate quite significantly1. as local competitive factors act to self-regulate pump prices. several factors. MJ ERVIN & ASSOCIATES 33 . The decline in refiner and marketing margins has both resulted in. 1 In fact. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. Finding 13: From 1991 to 1996. In particular. the actual fluctuation is much more pronounced than shown.

if not all of the difference in pump prices between Canada and the US.Figure 13: Monthly Gross Marketing Margins. although Canadian pump prices in urban markets are clearly higher than in the US. US Price History The retail gasoline tax structure in Canada is vastly different than the US. this is wholly attributable to the difference in taxation. US pump prices. for several years. This difference accounts for most. is presented in Figure 14. Canadian pump prices have been roughly equal to. A comparison of Canadian and US regular gasoline pump prices. On an ex-tax basis. with and without tax.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. resulting in significantly higher Canadian gasoline prices. or even less than. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . This shows that.

Prior to 1994. have improved considerably. trading at any given time within a relatively narrow (about 2 cents per litre) range. This would be a useful area for further research. both a cause and an effect of improved throughputs and ancillary revenues as previously described. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . page 24) and somewhat increased demand. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. behave in a very similar fashion. Canadian outlet throughputs (although likely still less than those of the US). largely as a result of two factors: • Canadian marketing margins have decreased in this period. While these trends have also occurred in the US. which is reflected in US average pump prices. • Although this study shows that on an ex-tax basis. when compared on an ex-tax basis.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. Canadian ex-tax pump prices were historically somewhat higher than in the US. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. as a result of outlet closures (see Figure 5. and moving up or down more or less in unison. This is no longer the case however. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. Figure 15 compares these values for selected Canadian and US centres over a period of several years. RFG has not been introduced to Canadian markets. From this it can be seen that Canadian and US rack prices.

Yet in the latter half of each year.000 34¢ 2.100.700.700. increasing significantly every spring. and prices tend to fall. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.000 24¢ 1.000 2. or indeed anywhere. Demand vs. not only in a given market. albeit less distinct pattern.000 1. Figure 16: Monthly Demand vs. as demand ebbs and inventory improves.900.000 1. Gasoline demand exhibits a very regular seasonal pattern. Price History Figure 16 shows the history of Canadian gasoline demand. the price tends to be bid upwards. Gasoline price exhibits a similar.000 2.100. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). rising and falling closely in step with demand.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.900. of motor gasolines from 1991 to 1996.500. and falling in the latter half of each year.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg.300. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.000 2. Pump Price (nominal ¢/litre) 3. a “buyers market” develops. but in fact across the North American continent (US demand follows a similar pattern).000 2. As non-refiner marketers attempt to secure a supply of this diminishing inventory. conditions begin to favour a “seller’s market”.500. compared to average ex-tax regular gasoline pump price for the same period. or sales. Simply put. and as would be expected in any commodities market under these conditions.

Whether in the spring or the fall. the essence of a free market economy. their related product costs and margins. has operated in a highly competitive environment. so do prices. a feature of most marketregulated commerce. while world crude prices and Canadian taxes have generally increased over the past several years. Figure 16 shows that from 1991 to 1995. despite a rise in demand.3%. This is of course. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. gasoline prices have not followed the traditional model. in that prices have fallen. This part of the study presented a number of historical views of retail gasoline prices. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. The traditional supply-demand model predicts that when demand rises. All of the findings suggest that. competing to meet their own needs. the downstream petroleum industry. and product taxes which add to the consumer price of gasoline. MJ ERVIN & ASSOCIATES 37 . The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. which ensures a competitive product price for buyer and seller alike. On a long-term basis however. as evidenced by declining industry margins. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. while average ex-tax pump price declined by 14% (since 1994. pump prices have increased due to a significant rise in crude costs in this period). demand rose approximately 8. which consists of the refiners and marketers of gasoline and other petroleum products. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis.

Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. ancillary revenues. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. A number of factors such as taxes.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. Nineteen markets were therefore adopted for the study (Table 3). play a role in a market’s pump price. namely product margin. although one was subsequently dropped due to insufficient submitted data.. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. and a more detailed examination of price. there is no regular monitoring of pump prices in smaller centres. MJ ERVIN & ASSOCIATES 38 . but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. outlet volumes. These “outside factors” tend to obscure the more relevant aspect of pump price. freight. is useful in providing broad overviews of industry price and margin trends. and pump prices alone provide very little opportunity for “comparability”. and in order to provide insights into the range of competitive dynamics that may exist. etc. outlet costs. • Methodology Selection of Markets A number of markets were selected for the study. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool.

are influenced not by one. To examine the competitiveness of the marketing. these organizations provided market-level data on freight costs. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market.000.Each market was classified according to regional affiliation (BC/Prairie.. and for smaller markets.and consequently competitiveness . In addition. but a number of variables. 2 Depending upon the outlet mode. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations.0001. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. Furthermore. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. Process Overview As illustrated in part A. retail outlet and brand representation. retail pump prices . and Group B markets less than 500. the gross marketing 1 Although White Rock is clearly not a major centre by itself. it was essential to obtain data not normally available through existing public sources. Suncor Inc. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. MJ ERVIN & ASSOCIATES 39 . price history data not available through public sources. the gross marketing margin must be examined in isolation from those other variables. Shell Canada. Petro-Canada. Five companies responded to this request: Imperial Oil. To this end. and Canadian Tire Petroleum. In all. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. Ontario. or “rack to retail” sector.

Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. average outlet annual throughput was determined for each market. Where differences in gross product margin might still exist. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). Where applicable. as the “blended” price includes other product grades. by product grade. 1 Although outlet cost and ancillary revenue data was not available for all markets. and the final “rationalized” gross product margin was determined for each market. 3. 1995 average values were determined for pump price. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. these were weighted by volume. From participant company supplied data. average pump prices are higher than actual average regular gasoline prices. Finally. weighted by sales demand. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. a broad representation of markets was possible. to arrive at “blended” values2. rack price. in addition to operating cost and ancillary revenue data gathered in the study1. and freight were successively removed from the pump price. Group B (smaller market) and 19-market study averages. a market-by-market profile of outlet income is presented. This allows for an accurate determination of net outlet revenue. 2 Accordingly. tax content. MJ ERVIN & ASSOCIATES 40 . including some smaller centres. Using the derived gross product margins and volumes for each market. 2.margin is stripped of its freight component. For each market. The gross product margin thus serves as an interim basis for comparing study markets. and freight. The variables of tax content. rack price. to derive the 1995 average gross product margin for each of the study markets.

Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. but they are relatively minor. When these margins are applied to outlet throughputs as in step 4 above. The derived weighted average values of pump price. marketing margin. Interpretation of Data In some smaller centres. encompassing a significant portion of the entire Canadian market. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. petroleum revenues. and accordingly represent a broad spectrum of consumers and marketers. so that on a cents-per-litre basis.. Bloomberg rack price values were used as the assumed wholesale price.. and outlet operating costs were deducted from total revenue. accurate comparisons are possible. grade differentials were based on known differentials of nearby markets. . Also. MJ ERVIN & ASSOCIATES 41 . also considering that RUL constitutes the majority of product.. a recognized source of data on world crude oil and petroleum markets and prices. represent a broad range of markets. and from one brand to another. This value was then applied to the gross product margin to determine average outlet petroleum revenue. and supplier profit. Supplier Overhead costs. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain. 7. Unlike retail pump prices however. While clear. it is important to understand that the use of rack price in this analysis has certain implications. A dollar-per-outlet estimate of these elements was made. the effect on the “blended price” is small.7 million. From participant company data. perhaps by 1 to 2 cents per litre. or consolidated net incomes. freight. average revenues from ancillary services were added. many wholesale petroleum purchases are made at less than the “posted” rack price. these 19 markets represent a combined population base of 8. Wholesale refined product prices used in this study are therefore likely to be overstated. These differentials do vary from one market to another.to determine average consolidated net revenue per outlet. 5. This variation is constant across all nineteen markets however. product margins. objective data exist for both of these values. and therefore where assumptions were made.. 6.. and gross product margins are therefore likely to be understated.4. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. as described on page 10. including relatively smaller ones such as Sioux Lookout or Gaspé. etc. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. In referring to marketing margins.

8 cent difference in pump price 1 See footnote at Appendix II. accurate. The 19-market study group exhibited a statistical variance1 of 17. The first of these variables to be examined is tax.38 cents per litre in ex-tax pump price. broken into tax and extax components. table J for an explanation of how variance is derived. there is little to suggest why such a high variance exists.64 cents per litre in pump price. MJ ERVIN & ASSOCIATES 42 . Tax Figure 19 shows posted pump prices for the study markets. but a variance of only 12. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. higher priced markets are associated with smaller population centres. The data shows a statistical pump price variance of over 17 cents per litre within this study group. and based on objective. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however.Rack prices used in this study are nevertheless market-driven. independently gathered data. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. The data also shows that typically. while lower prices tended to prevail in major centres. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets. The study data suggests that variations in tax rates account for a significant part of pump price differences. A 6.

provincial tax rates can vary greatly.less than one-half cent per litre. This eliminates any effect that tax variability may have. it is therefore more useful to use ex-tax pump prices when comparing any two markets. thus providing a better basis for comparison. while taxation between provinces is more pronounced . Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry.75 cents per litre (Vancouver. or when examining historical price trends. 1 Due to pump price differences.between Calgary and Vancouver for example.tax. Montreal). namely the upstream industry and refiner sector. additional elements of the revenue stream must be further isolated.while all markets are subject to the same rate of federal excise tax and GST1. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. In all study markets. was less than three cents. Figure 19: Pump Price . Upstream and Gross Refiner Margins Although the deduction of tax content is useful. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. taxes were a significant element of pump price. GST content can vary by market. but the variance is minimal . accounting for roughly half of the average retail price. when examined on an ex-tax basis. The data shows that taxation between markets within the same province varies little. MJ ERVIN & ASSOCIATES 43 . Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. as described in part A. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.

This is due to the fact that for any market. as is examined below. When rack price is deducted from the ex-tax pump price. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. reflecting some differences in refinery crude acquisition costs. reflecting the reality that at the rack level of competition. but ultimately. and therefore are best analyzed separately. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. the validity of analyzing gross marketing margins in isolation might be raised. and their respective margins. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. if a clear understanding is to be achieved. in the case of Thompson). It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. it should be restated that each of these sectors. the rack price is equivalent to the upstream margin plus the refiner’s margin. rack and pump prices. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. Furthermore. as this would cause rack buyers to bring product in from the lower-priced region . MJ ERVIN & ASSOCIATES Cents per litre 44 . To address this. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie.assuming transport costs did not outweigh the price difference. the rack price is set at the rack point (Winnipeg. Freight costs are additional.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. one region cannot maintain rack prices at a higher level than another. differ little from those of major centres. are clearly delineated by market-driven crude. rack price) and gross marketing margin elements.

Although freight operations are often an integral part of many petroleum marketing operations.16 cents per litre (gross marketing margin) to 7. one final outside variable must be isolated: that of product freight. in fact.3 cents per litre.49 cents per litre (gross product margin). this freight cost is almost negligible. particularly in comparisons of major urban markets to small. For other. generally smaller markets. and therefore a significant pump price factor. the data shows that freight is often a significant part of the gross marketing margin. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply.0 cents per litre. Before using this as an analytical tool however. resulting in comparative gross product margins. with their component freight costs. Figure 21 shows a study market comparison of gross marketing margins. as low as 0. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. To provide a comparative view of the marketing dynamics within the study group. remote population centres. it is therefore important to eliminate the freight variable from the gross marketing margin. MJ ERVIN & ASSOCIATES 45 . it is essentially a “non-core” business. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. Two of the study markets had freight costs in excess of 3. For markets which are also established as rack points.

Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.a variance of only 2. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets. 1995 gross product margin averaged 5.5 cent variance in gross product margin is still significant however. as the 3. A 7. was the lowest. Bloomberg rack price values were used as the assumed wholesale price.95 cents per litre.17 cents per litre. to the resultant retail gross product margin . at 14.5 cent per litre average relates to regular gasoline in major markets.the gross revenue available to the petroleum marketing sector for its operations.6 cents) to the variance in their component gross product margins (7.5 cents). was the highest of the study group.5 cents per litre average Gross Product Margin cited in Part B.06 cents per litre. product margins.68 cents per litre1. while Toronto. In referring to marketing margins. MJ ERVIN & ASSOCIATES 46 . Gaspé.6.42 cents per litre. petroleum revenues. or consolidated net incomes.68 cents per litre. at 3. The study revealed that: • • Retail gross product margins differ very little between major urban markets . whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. Group A (larger population) markets averaged 5. For all study markets.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.22 cents per litre Smaller markets showed a wider variance in gross product margin . or between any two regions. while Group B markets averaged 7.

If these two factors are related to each other as they are in Figure 24. a wide range of variability still exists between markets in the study group . A wide range of volume performance is evident. vs.000 1. Indeed.000. for example.000 Litres 3.000 4. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.1 cents per litre in Toronto. if any retail gasoline outlet located in the Toronto area for example.000. an examination of related outlet throughput volumes is necessary.000. 3. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets.000.differences between markets. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow.000 litres per year (Sioux Lookout) to over 5.000 litres per year (Toronto).000.000 2.000. once isolating retail gross product margin from all of the “outside” pump price factors.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. To understand why such a wide range of margins can exist after eliminating all tax and freight variables. sold significantly less than 5 million litres of petroleum per year. it would likely be so unprofitable as to be un-viable.14. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000 5.000. ranging from under 700. Figure 23: Average Annual Throughput per Outlet 6.2 cents per litre in Gaspé.

Smaller markets perform as competitively as larger centres. it follows that higher gross product margins will be the consequence. On average however.000 Volume (litres) 4. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. the Group A market outlets had roughly 50% more throughput than Group B outlets .000 5.000 2.4 million litres annually. compared to 2. Although MJ ERVIN & ASSOCIATES 48 . Regionally.6624 1.962 R2 = 0. With few exceptions.Figure 24: Outlet Volume vs. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5.that is. As most outlet operating cost are fixed in nature . Ontario.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.42 cents) than smaller (Group B) population centres (7.000 6.000. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. while those with high Gross Product Margins tend to have low outlet throughputs. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.000. not of poor competition. all market groups (BC/Prairie.000.000.95 cents). they remain essentially the same regardless of volume changes .7 million respectively.6634Ln(x) + 76. If all outlets in a given market experience generally low throughputs.000 3.000. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.

000.000 2.000. and must be examined. and supplier MJ ERVIN & ASSOCIATES 49 .000.000 4.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences. outlet-based view of retail markets. product cost. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). Figure 25: Outlet / Volume Relationship . car wash.716 . averaged $69.000.000 5.000. ancillary sales. and auto service.the revenue available for dealer income. such as convenience stores. It represents the residual revenue which is available to the dealer and to the supplier. supplement their incomes with other revenues. as described below.000. two additional factors are introduced: ancillary revenue and outlet operating costs.000 3. Consolidated Net Revenue per Outlet To create a complete. competitiveness occurs between retail outlets. and ultimately shows that very little difference in competitiveness exists between any two markets. less outlet costs. this is likely due to the higher incidence of Group B study markets within this region. In reality. however.000 6.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. and the resultant consolidated net revenue. These additional factors clearly have an effect on the relative competitiveness of retail markets. supplier overhead costs. in addition to petroleum sales. is only a measure of petroleum revenue per litre. while operating costs are those costs which are directly incurred in the operation of the retail facility. Gross product margin. which.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. and incur many expenses in the course of their commerce. Figure 26 summarizes total outlet petroleum sales. Ancillary revenues are those derived from non-petroleum sales sources. which for the study group.

000) $(250. Most markets showed relatively similar net revenues (see Appendix II. Table K). MJ ERVIN & ASSOCIATES 50 .000) $(150. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. Figure 26: Outlet Revenues.Group B outlets were not as profitable as these revenue values might suggest. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000) $(300. these ancillary operations contributed to a lower product margin and consequently. and his personal labour investment. Finding 19: Based on published rack prices. which reflects his investment in the outlet. as explained below.000) $(200. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000 $50. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. Costs. A discussion of the ultimate distribution of this revenue is useful. Income BC/PR $300. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. causing the weighted average for Quebec / Atlantic to be depressed).profits. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000 per year respectively .000 $150. In effect.000 vs. reduced pump prices.000 $100. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . As described above.$154. $60.000) $(100.000) $(350. An examination of these component elements reveals a significant finding: that for most markets.000 $250.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist.000 $200.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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as described below.968 litres 7.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . and also has local refining capacity. while average throughput ranked 4th. Overall.542. This may explain the somewhat elevated gross product margin in this market.38 ¢ 7. Vancouver provides several perspectives into retail marketing.000 barrel per day plant located in the greater Vancouver area. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. a 60.98 ¢ 0.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . but well within a cluster of markets with similar throughputs.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. Influence of other markets: Although relatively close to the US border.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. ranking 11th.ex tax Canada Average . net outlet revenues were less than those of other major centres. Figure 28: Vancouver .Vancouver population # of brands # of outlets outlets per 10. contributing to a higher than average pump price. Low consolidated net revenues may have contributed to the higher margin. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market.745 18 446 2.000 1.658. The somewhat high margin placed this market slightly above. and with access to wholesale product by several means. Vancouver collects a 4 cent per litre municipal tax. Geographic / Supply / Freight cost considerations: As a port city. Vancouver is also a terminal for a refined products pipeline from Edmonton. this market has access to numerous refiners along the Pacific coast through marine supply.

White Rock population # of brands # of outlets outlets per 10. Vancouver. thus providing some unique characteristics for the market study. This suggests that. This is likely due to the fact that unlike many smaller markets.604. prices in this market have historically mirrored those of Vancouver. In all respects. the study data found little to suggest a material effect upon representation. White Rock’s margin was typical of markets with similar outlet throughputs. this market is subject to a 4 cent per litre municipal tax.315 4 8 4. and retail gross product margin was less than that of markets with a similar population base. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Price history / Taxation: Although no specific data is available. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Like Vancouver. adjacent to the United States border. gasoline “cross-border shopping” is less pronounced than might be expected. Freight costs were accordingly low compared to other small markets in this study.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC. but less than most markets with a small population base. Despite its relatively small size.45 ¢ 7.000 16. prices. This market is close to its usual rack point. due to its proximity to one. Average outlet throughputs were relatively high. White Rock is essentially part of a major market due to its proximity to Vancouver. the White Rock retail gasoline market displayed the same attributes as a major urban market. Geographic / Supply / Freight cost considerations:.630 litres 7.98 ¢ 0. at least in this market. or competitive dynamics. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver. MJ ERVIN & ASSOCIATES 55 . Influence of other markets: Although this market is a border-crossing community.

23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Rack-to-outlet freight costs are among the lowest in the study group. Product is usually sourced from Edmonton refineries via pipeline.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . creating some competitive pressures (see Nanton). which was one reason for selecting Calgary as a study market.000 710.Calgary population # of brands # of outlets outlets per 10.827.719 litres 6.ex tax Canada Average . Consolidated net revenue: was typical of other major markets in the study group.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . Calgary had the third highest number of retail brands. Influence of other markets: Calgary is fairly remote from US and other major markets. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Other considerations: Of the markets studied. Some smaller markets in the vicinity have occasionally priced below Calgary.24 ¢ 6. indicative of a strong competitive climate.675 27 313 4. Price history / Taxation: As the figure below shows. Indeed. Figure 29: Calgary . pump prices in this market have historically been well below the Canadian 10-city average.47 ¢ 0. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Calgary pump prices are very close to the Canadian average. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Calgary is of sufficient size to support a viable rack market.

and therefore experiences no particular influences from any other major market.21 ¢ 7.794 litres 7. supply/demand is likely more balanced. and this market is now more typical of other large population centres. which are among the highest in Canada.50 ¢ 0. Although no supporting data is available.180 15 86 4.Regina population # of brands # of outlets outlets per 10. and a history of volatile pump prices. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. margins and throughputs were typical of other markets with a similar population base. This is partly due to provincial taxation levels. and is therefore a recognized rack pricing point. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Consolidated net revenue: was typical of other similar markets. Regina was of some interest as a study market. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Ex-tax prices are also above average. it is likely that this reflected a surplus of wholesale inventory within the local market or region.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . this market is removed from other significant markets.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Figure 30: Regina .000 179. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. Since 1993. price volatility has eased.ex tax Canada Average . Influence of other markets: Like Calgary. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.089.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Since then.

this market is removed from other significant markets.217 litres 8. prices have tended to stay somewhat above the Canadian average. Price history / Taxation: In the early 1990’s this market experienced some price war activity.000 616. this market has exhibited relatively stable pricing. Consolidated net revenue: No ancillary or outlet cost data was available for this market. possibly due to modest ancillary revenue. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. On an ex-tax basis. Since then. Figure 31: Winnipeg . it is an established rack price point.ex tax Canada Average .Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . This may reflect a lower than average Consolidated Net Income. probably related to a regional surplus of wholesale inventory (see Regina).Winnipeg population # of brands # of outlets outlets per 10.06 ¢ 0.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. although. and therefore experiences no particular influences from any other major market.265. Influence of other markets: Like Calgary.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . although there is no study data to support this.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.790 17 261 4. like most markets of this population density. and has remained very close to the Canadian 10-city average.22 ¢ 7. though somewhat higher than average ex-tax pump prices. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.

while others experience consistently high prices.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Nanton had the second lowest gross product margin of the study group.far in excess of what would be expected of a community with a population of 1. in order to maintain a share of the considerable potential sales revenue that passes through this market. and perhaps healthy ancillary sales associated with highway traffic. Average outlet throughputs were relatively low. Nanton has traditionally priced either at or below Calgary.the highest of the entire group .000 1. Price history / Taxation: In order to attract market share beyond simply the local population. as Figure 24 shows. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. placing Nanton well below the expected margin. MJ ERVIN & ASSOCIATES 59 . Influence of other markets:. the retail gasoline market in Nanton was not restricted to the local population. Due to its highway location and its proximity to Calgary. Despite its small size. due to its proximity to one. While these conditions would normally result in a high gross product margin. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Nanton appeared to benchmark its pump prices to those of Calgary. although not as low as expected.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. Unlike many of the smaller markets in this study group. Nanton had a high number of per capita outlets . in terms of expected petroleum revenues. situated on a major North-South highway to the United States Among the study group. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. Alberta population # of brands # of outlets outlets per 10.91 ¢ 0.000 litres 5.585 4 5 31. more isolated small-town markets. In this respect. Nanton was perhaps the least viable market in the study group.41 ¢ 5.Nanton. would have an offsetting effect. Consolidated net revenue: No Ancillary or cost data was available.600.071. the Nanton retail gasoline market displayed the same price attributes as a major urban market. this market has a relatively low freight overhead. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . Nanton was the smallest market in terms of population.and a low average outlet throughput. it is likely that low operating costs. a feature not available to other.

85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. other markets. this market has little or no influence upon. high pump prices.Peace River. Alberta population # of brands # of outlets outlets per 10. and was accordingly chosen as a study market.000 6.45 ¢ 1. further adding to overall high pump prices.6 cents per litre. Peace River has among the highest freight cost in the study group.715 6 8 11. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. isolated markets. they were comparable to other markets with similar average throughputs. and in fact fell into a tight cluster of four other study markets.6 ¢ 10. Peace River also experiences high freight costs. isolated markets. Price history / Taxation: Peace River is typical of small. though fairly typical of many smaller.157. In contrast to Nanton.623 litres 12. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. its normal rack point. nor is it influenced by. Geographic / Supply / Freight cost considerations: At 1. experiencing relatively high gross product margin and consequently.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. MJ ERVIN & ASSOCIATES 60 . Supply is via tanker truck from Edmonton. and due to its isolated locale in northern Alberta.

1 ¢ 3. This however. experiencing relatively high gross product margin and consequently. other markets. nor is it influenced by. It also experienced high freight costs. Price history / Taxation: Thompson was typical of small. Although ancillary revenues were the smallest of the study group.02 cents per litre. high pump prices. Other considerations: Like other small markets. thereby creating the potential for narrower margins. they were comparable to other markets with similar average throughputs. and reduced pump prices. further adding to overall high pump prices. the community of Thompson clearly falls into the category of a small. Although outlets in Thompson appear to be as competitive as those of any other study market. Thompson is among the highest freight costs in the study group. resulting in per-outlet petroleum revenues which were quite typical of many markets. isolated markets.014. and in fact fell into a tight cluster of four other study markets. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. These factors resulted in relatively strong per-outlet net revenues. Consolidated net revenue: Low outlet throughputs were offset by higher margins. Influence of other markets: Since is not located on a major inter-uban thoroughfare.Thompson.975 5 6 4.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River.520 litres 14. Supply is via tanker truck from Winnipeg. its usual rack point. Manitoba population # of brands # of outlets outlets per 10. Thompson is faced with the dilemma. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Geographic / Supply / Freight cost considerations: At 3.02 ¢ 11. MJ ERVIN & ASSOCIATES 61 . outlet costs were also modest typical of most smaller markets. this market has little or no influence upon. a significant portion of which would likely be distributed towards supplier overhead costs. and due to its isolated locale in northern Manitoba. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. remote market.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.000 14.

it had the second highest brand variety of the study group.36 ¢ 0. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. On an ex-tax basis however. This is likely offset by high operating costs. Consolidated net revenue: Although no study data was available for this market.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. With an average “blended” gross product margin of only 3.000 2. least number of outlets per capita.775 30 546 2.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. this market was consistently less than the 10-city average.275. Within this region are thousands of retail outlets. similar to that of Montreal. Figure 32: Toronto . exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . Influence of other markets: This market is continuously linked with several other major retail markets.Toronto population # of brands # of outlets outlets per 10. and a resultant low consolidated net revenue.06 cents per litre.478 litres 3. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average . thus there exists a climate of robust competition. stretching from Pickering to Buffalo.3 ¢ 3. as evidenced by an exceptionally low gross product margin. and first in average throughput per outlet.extax Toronto Posted Price . In addition. this market ranked first in a number of measures: lowest gross product margin. New York. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. it is likely that outlet ancillary revenues are among the highest in the country. It consequently has a low freight component.098. and is also relatively close to wholesale supply sources in the US.

This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. and close to the Canadian 10-city average.004.145 19 209 3. slightly lower that expected.97 ¢ 0.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 . Consolidated net revenue: was low. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point. in fact.29 ¢ 5.000 678. rural markets co-exist in this area. Although petroleum revenues were typical of major markets. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. and operating costs were higher than most.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. ancillary revenue was slightly lower than average.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. several smaller. Figure 33: Ottawa . some of which have on occasion priced below Ottawa (see Nanton and Calgary). freight costs within this market were quite low.948 litres 5.ex tax Canada Average . Other considerations: While pump prices in this market were somewhat higher than in Toronto. exhibiting all of the characteristics of robust competition. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Influence of other markets: Although Ottawa is the only major market in the immediate area.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .Ottawa population # of brands # of outlets outlets per 10.

Influence of other markets: This market is close to a US border market. average throughputs were modest. this Canadian market has some difficulty in remaining both competitive and viable.73 ¢ 1. Freight costs are therefore high. This would suggest that a significant market share is being lost across the US border. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. a consequence of the transport distance from the rack point. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). partly due to higher freight costs.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply. Sault Ste Marie is a sizable market. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. Pump prices in this market were thus typical of any market with similar throughput characteristics.Sault Ste Marie population # of brands # of outlets outlets per 10. and accordingly. a product of relatively strong net petroleum revenues combined with lower than average operating costs.000 81. somewhat isolated. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group.475 10 24 2.550 litres 8.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. yet with some potential for cross-border retail competition.22 ¢ 7. MJ ERVIN & ASSOCIATES 64 .465. and between 5 to 8 cent per litre in gross product margin.

Sioux Lookout is well-removed from any major highway. brands. despite its high prices. was much less than expected for a market of this size. Freight costs are therefore high. MJ ERVIN & ASSOCIATES 65 . and had the least number of outlets.Sioux Lookout population # of brands # of outlets outlets per 10. Consolidated net revenue: No data was available for this market.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin.2 ¢ 11. with little or no influence from other retail gasoline markets.96 ¢ 3.066 litres 14. This would suggest that. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. although high. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. Influence of other markets: This is clearly an isolated market. in fact the second highest in the study group.310 3 3 9. this market experiences a high degree of price competition. An average outlet in Sioux Lookout pumped only 694. one-seventh the average throughput in Toronto. This is a major factor in the high cost of gasoline in this market. and outlet throughputs of any market studied.006 litres in 1995. so that virtually all sales volume represents local demand only. largely due to higher freight costs.000 3. It therefore presents some unique characteristics for the market study.

5 cents per litre was introduced into the Montreal area).13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.870 32 866 4.3 ¢ 5. It therefore represents a highly competitive rack market. this market ranks first of the study group in terms of brand variety. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. pump prices in this market have a tendency to be volatile.extax Montreal Posted Price . a function of a competitive rack market and an excess of retail outlets competing for market share.775.43 ¢ 0. Figure 34: Montreal . this market interacts with several other markets in the region. Montreal was included in the selected market study. Influence of other markets: Like Toronto.394.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . This. placed Montreal lowest of all study markets in terms of consolidated net revenue. with resultant low average outlet throughputs.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.000 1. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. an additional tax of 1. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. pump prices in Montreal have generally been at or below the 10-city average for major markets.Montreal population # of brands # of outlets outlets per 10. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. thus promoting a competitive climate. On an ex-tax basis however. With 32 competing brands. combined with low petroleum revenues and high operating costs. Price history / Taxation: As the figure shows.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. and is also relatively close to wholesale supply sources in the US.144 litres 5.

Margin/Throughput relationship (Figure 24): Outlet throughputs. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. were quite typical of markets with similar populations. by tank truck.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base.000 120. this amounted to a reduction of 5. MJ ERVIN & ASSOCIATES 67 . Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. yet is geographically quite isolated.289 litres 12. but as the figure shows. a partial factor in the high cost of gasoline in this market.28 ¢ 1.250. both pump and ex-tax prices in this market were higher than average.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Consolidated net revenue: was average among the study group. but is quite isolated from any other markets. In the case of Chicoutimi.605 14 97 8.08 ¢ 11. Chicoutimi is normally supplied from the Quebec city rack. Freight costs are therefore somewhat high. Nevertheless. for example). Gross product margin was accordingly high.75 cents per litre.Chicoutimi population # of brands # of outlets outlets per 10. although low. within a cluster of other markets with similar attributes. this market has little potential as a rack market.

in the case.900 litres 17. This is a major factor in the high cost of gasoline in this market. so that virtually all sales volume represents local demand only.50 ¢ 3. MJ ERVIN & ASSOCIATES 68 . Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. both pump and extax prices in this market were higher than average. amounting to a reduction of 5.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. Gaspé is well-removed from any major highway. ancillary revenues would likely be modest. Influence of other markets: This is clearly an isolated market.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981.Gaspé population # of brands # of outlets outlets per 10. Although operating costs are likely to be low in a small market like Gaspé. Nevertheless. Nevertheless. Freight costs are therefore high.17 gross product margin the highest of the study group.000 16. with little or no influence from other retail gasoline markets. a key factor contributing to its 14.33 ¢ 14. located at a considerable distance from its rack source of supply.75 cents per litre. this margin was only slightly higher than expected for a market with these throughput attributes. a product of high freight costs and gross product margins. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. in fact the highest in the study group. by tank truck.400 6 13 4. Consolidated net revenue: No data was available for this market. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack.

That a major refinery resides in this market might suggest that these prices should be among the least in the country. Nevertheless. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. the Saint John retail market is relatively isolated from other retail markets of any significance. Figure 35: Saint John NB . The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor. resulting in lower than expected average outlet throughputs. with or without a local refinery. Consolidated net revenue: was average for the study group. Price history / Taxation: Historically.000 74. and therefore. Accordingly.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Average gross product margin was consequently high. reflected in the high ex-tax pump price.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. do not differ markedly from any other rack point in the study group. retail pump prices are ultimately a reflection of rack prices. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. ex-tax prices were relatively high. and is capable of shipping and receiving wholesale product through marine facilities. In fact.27 ¢ 9.694 litres 9.ex tax Canada Average . Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. freight costs in this market are low. which for Saint John. Since provincial taxes are among the lowest in the country. posted pump prices in the Saint John market have closely followed the 10-city average.095.79 ¢ 0.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Saint John presents some unique characteristics for the market study. it is an established rack point. this market fell within the expected range of gross product margins as a function of outlet throughput.Saint John NB population # of brands # of outlets outlets per 10.970 9 56 7.extax MJ ERVIN & ASSOCIATES 69 .

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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........................ The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations......... The viability of the Canadian retail gasoline sector as a whole may be somewhat better................ 50 Finding 20: For the 481 individual outlets studied...................................... remote population centres................. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences.......... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre........................... residuals for outlets not studied may be better................................ In effect.. ..................... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied.................. 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness......... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads................ are principally a reflection of changes in the underlying price of crude oil...... the profitability of the 481 outlets studied appears only marginal. and likely a negative impact on consumers........................ ........ these ancillary operations contributed to a lower product margin and consequently..................51 Finding 21: Based on published rack prices and the individual outlet data........... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.......... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements................. 71 MJ ERVIN & ASSOCIATES 73 . ............. which in turn....... ................... which ensures a competitive product price for buyer and seller alike......... given the possibility of discounts from posted rack prices and potentially lower overhead costs..... the residual represented a net loss to the supplier................. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.............. 33 Finding 13: From 1991 to 1996............. ....................................... a feature of most market-regulated commerce........... reduced pump prices............................ 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs..................... 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels......................................... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.. particularly in comparisons of major urban markets to small............... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.......................... ................... 48 Finding 19: Based on published rack prices....... while those with high Gross Product Margins tend to have low outlet throughputs.................. when compared on an ex-tax basis.....

Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. The study presents such a model. over the long term. is mistaken. the very margins within which this industry operates has. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. Although an objective measure of competitiveness is elusive. In comparing several diverse markets. On a national level. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). by all objective measures available to this study. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. was observed (Finding 10). when taxes were excluded (Finding 14). 2. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. 1. in comparing Canada average (city) pump prices to those of the United States. and promotions are the other three). Rack and pump prices are determined in competitive marketplaces. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. The Canadian retail petroleum products industry. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. Canadian prices have been at or below US prices in recent years. price is but one of four competitiveness “tools” available to marketers (product. place. As described in this study however. The resultant margins. when measured in constant and nominal dollars. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). each with unique dynamics. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . exhibited a diminishing trend (Finding 13). This has not simply been a result of a decline in underlying raw materials costs. was shown to be strongly competitive: • A long-term decline in pump prices.

demand and other competitive factors existing at the time. it is important to understand that. well over half of all outlets in Canada operate as lessees or independents. In applying such a model to the retail petroleum marketing industry. refiner margins accounted for 5. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. Due to the localized nature of competition in the retail gasoline marketing sector. vary considerably from one population centre to another. municipal levels of government. presents a competitive disadvantage to Canadian marketers. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). while crude oil markets are considered global in scope and rack product markets are considered regional in scope. but given its magnitude. and accordingly. Petroleum product taxes are levied at the federal. particularly smaller ones. 3. an exercise that consumers are unlikely to engage in.5 cents. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. and in some markets. experienced higher than average pump prices. and are a predominant cause of inter-regional pump price differences (Finding 16). This implies that the competitive dynamics pertaining to these retail markets can. or even between Canadian markets with differing tax structures. While some markets. but even in such cases. for example) were rationalized. and product margins accounted for 3. The latter two can vary considerably from one market to another. provincial. retail petroleum markets are considered local (municipal) in scope.even negative values. Taxation is a significant factor in the price of retail gasoline. since this is the effective range of consumer choice. The demonstrated exception to this is in markets directly adjacent to nearby US markets. taxation differences between Canadian and US markets. and do. are thus a reflection of the state of product supply. rack price and freight cost. taxation as an element of public policy is an area worthy of additional research. or 6 percent (Finding 6) of the 1996 average regular pump price. crude costs accounted for roughly 34 percent (Finding 2). these markets have managed to sustain a certain level of viability and competitiveness. By contrast. This would entail the tracking of not only pump price. MJ ERVIN & ASSOCIATES 75 . Dealers were shown to have a variety of relationships with their supplier. generally do not serve as competitiveness inhibitors. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. but also rack prices and outlet performance. when the “outside” factors (tax.3 cents or 9 percent (Finding 5). measured against the average outlet throughput for that market. and in some markets.

the Canadian retail marketing sector realized an average gross margin of 3. 4.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). Retail gasoline marketing revenues. when examined on the margin-volume model. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. Sioux Lookout. supplier costs and profitability. Pump price fluctuations can be an indicator of competition in the marketplace. Retail pump prices showed a corresponding seasonal pattern. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. incorporated with ancillary revenues and outlet costs. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. While price wars are undoubtedly an indicator of competitiveness. fluctuating prices are a strong competitiveness indicator (Finding 7). it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. which in turn is the principal driver of ex-tax pump prices. Retail pump price changes showed a close relationship to underlying rack prices. predictable seasonal pattern. and a loss in the case of urban markets. which represent the majority of Canada’s population base. a price-stable market. is available to provide for all retail marketing operations including outlet costs. This margin represents gross revenue (after wholesale product and freight cost) which. Viewed from this perspective. The pump price/margin model shows that in 1996. in a highly distinct. constitute a small portion of the retail pump price. reflecting consumer demand behavior (Finding 15). This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. 5.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. dealer income. second only to the United States. which in turn. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). Rack prices were shown to not significantly differ between major centres. In fact. the absence of price war activity does not imply a lack of competitiveness. showed a close relationship to underlying crude prices (Finding 11). MJ ERVIN & ASSOCIATES 76 . when distributed these three ways (Finding 20). Demand for gasoline was shown to vary significantly according to the time of year. This consolidated outlet revenue. exhibited competitive traits typical of any of the study markets. on a per litre basis. and more price-stable markets such as Sioux Lookout. on the basis of price fluctuation alone.

improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Declining refiner and marketing margins. While these economics might appear to place this industry in a position of poor viability. and have resulted from. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. this industry sector would have realized profits of unprecedented proportions. crude costs. most outlets used in the 19-market study represent major integrated oil companies. Industry profitability is extremely sensitive to very small changes in pump price. if Canadian average pump prices were only one cent higher than they were in 1995. Nevertheless. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Thus. 7. in the long term these fluctuations are likely more reflective of market restorations. This trend has both resulted in. despite increases in tax content and crude costs (Finding 12). Indeed. not excessive profits. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). assuming all other costs were unchanged. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. MJ ERVIN & ASSOCIATES 77 . serve as perhaps the most significant indicators of competitiveness in the downstream industry. Also. and the associated industry initiatives which are ongoing in nature. have caused. both of which are beyond the direct influence of Canada’s oil companies. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. but to increases in underlying rack prices. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. not price. based upon an assumed posted rack price. several competitive strategies. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability.6. these findings clearly show that pump price increases are ultimately linked not to increased profits. Also. and the marketing sector in particular. despite the predisposition of many observers to use them as such. Since 1991. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. and in turn. including: • • • improving production efficiency through refinery plant rationalizations (closures). and has been a result of. intense competitive pressures in the downstream industry in general. Both the downward trend in margins. Thus.

That such a relationship should exist was not surprising. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities.5 million fewer litres of gasoline than a group A (major centre) station. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17).8. In suggesting this approach however. which could actually inhibit competition. which should. A wide range of petroleum gross product margins were evident within the 19market study group. • • At first glance. poor outlet throughputs were generally the predominant factor. MJ ERVIN & ASSOCIATES 78 . from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. thereby improving petroleum volumes and ancillary revenues at the remaining sites. Smaller. according to the margin-volume model. When these margins were compared to their corresponding outlet throughputs. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. While competitiveness in most smaller markets was shown to be as active as in larger centres. 9. and this study showed that gasoline prices were no exception. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. The costs of most consumer goods in smaller. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). Although some smaller markets appeared to have higher gross product margins than larger markets. it would seem that if local government in smaller markets were interested in lowering pump prices. had petroleum margins which were commensurate with average outlet throughput for that market. although this study provides comprehensive evidence of this. When plotted against the margin-volume model. most markets. regardless of size. isolated markets face particular challenges: although found to be highly competitive. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. the solution would be to encourage some dealers to exit the market. virtually all of the 19 study markets exhibited similar levels of competition. This created some economic pressure to sell product at a higher pump price. other factors exist which contribute to relatively high margins and prices. Thus. more isolated markets are generally higher than in larger centres. average pump prices were relatively high. reducing the number of outlets may also reduce the number of competitors. Outlet throughput is a key determinant of inter-market pump price differences. there are three points to consider: • In very small markets. reduce pump prices.

were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. 11. Charlottetown. The federal Competition Bureau for example. is viewed as an agency which exists to the benefit of industry and consumer alike. many national and local environmental regulations exist for good cause. in order to build upon the findings in this study towards a full understanding of the dynamics at work. MJ ERVIN & ASSOCIATES 79 . and in turn. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. This competition then. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. and as such. as marketers find even more innovative ways to attract market share. has seen a decline in pump prices relative to other Canadian markets. The loss of employment represented by a station closure may be of some concern to smaller communities. and likely others in Nova Scotia. The historical record is clear however: since deregulating pump prices.• A full-serve retail gasoline outlet typically employs 3-5 staff. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). depressed petroleum revenues below that of outlet operating costs. Also. are an acceptable limitation on pure competition (Finding 8). will likely preserve a highly competitive petroleum market. As these findings show. the degree of price competition in the retail petroleum has in effect. Retail ancillary operations are a critical element of petroleum price competition. and the perceived effect on their markets. 10. Convenience store. and the traditional automotive service bay. characterized by narrow product margins and relatively flat pump prices. car wash. is well beyond the scope of this study. the Halifax market. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. does not appear to benefit in consumer terms. under the current PEI regulatory structure. is both the cause and consequence of increased activity in ancillary operations. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs.

A regular comprehensive competitiveness evaluation. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Public perception measurement. that where a healthy competitive climate exists. in a simple format designed for consumers and legislators. Develop cooperative industry research into marketing sector competitiveness issues. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. 1. as it does in the Canadian petroleum marketing sector. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. 2.This study proposes rather. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. direct regulatory interventions may have an adverse effect on competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . possibly to the detriment of the consumer. not inhibit. and the converse image held in much of the public domain. This should be in the form of a quarterly summary of price trends and related measurements. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. and the nature of competitiveness influences. margins and competitiveness factors. petroleum marketing competitiveness. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Improve public understanding and awareness of competition in the petroleum marketing sector. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research.

MJ ERVIN & ASSOCIATES 81 . Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. using Canadian and foreign selected markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. along the lines of the model used in this study.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. • • • • * * * Better understanding of this industry. using Canadian and foreign selected markets. by industry. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and issues/opportunities facing such markets. and regulators alike. consumers. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. using Canadian and foreign selected markets. and in particular.

Appendices MJ ERVIN & ASSOCIATES 82 .

Excise Tax . Downstream . the regular unleaded pump price. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. etc. Dealer .the difference in pump price between a premium or mid-grade of gasoline vs. generally expressed in cents per litre.(for the purpose of this study) the cost. Grade Differential . car wash.Canadian Petroleum Products Institute. CPPI . Marketer ..a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. Distribution Costs . and included in the retail pump price. such as a retail gasoline outlet. lubricants. for example. and in some regions. These product taxes include Excise tax. such as lessees. currently established at 10¢ per litre. Major Oil Company .a petroleum marketer who is not involved in the refining of petroleum products.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. municipal tax levees. and therefore purchases its supply of petroleum product from an outside source. Ex-tax Pump Price .a generic term referring to a retail outlet operator.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. and commission dealers. which serves as the voice of the petroleum products industry in Canada on environment. The ex-tax pump price is exclusive of these taxes. GST. provincial pump tax. etc. Integrated Oil Company .a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. independent dealers. Margin . service bays..a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. Independent Petroleum Marketer . in cents per litre. of transporting petroleum product from the rack point to the final point of sale.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline. diesel. safety and business issues.I Glossary of Terms Ancillary service . such as a major oil company or regional refiner/marketer. but inclusive of any corporate taxes on earnings. Lessee . such as convenience goods. health. Usually expressed on a per-unit basis.an organization who sells refined petroleum products to end-use consumers.the retail price of gasoline that would be displayed if all product taxes were removed.a service provided in addition to the basic retail petroleum sales operation. an association of petroleum refiners and marketers. MJ ERVIN & ASSOCIATES 83 . There are several modes (see below) of dealer operation.

Mode . This may be at a refinery loading terminal.the segment of the oil industry involved in the exploration and/or production of crude oil.within the context of retail gasoline marketing. Supplier . Transfer Price . these can be broadly classified as company operated. the raw material from which petroleum products are manufactured. manufactures (from crude oil) a range of petroleum products suitable for consumer use. and independent dealer. it is usually based on the market-driven rack price. Although in theory the transfer price could be set at any arbitrary value. PCF . In the retail gasoline sector.the point at which title to refined product is transferred from the refiner to the supplier.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. MJ ERVIN & ASSOCIATES 84 .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. Rack Price . Throughput .an organization who. commission dealer.Petroleum Communication Foundation.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. lessee. Refiner . Rack Point .the type of contractual relationship between the supplier and the dealer (outlet operator). Upstream . or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. Regional Refiner/Marketer . usually per month or per year. is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products.the wholesale price posted at the rack point. an association of upstream and downstream oil companies and related organizations. the supplier has initial title to the petroleum product as it leaves the rack point.

4 124.1 1990 119.9 97.5 115.1 126.5 120.2 99.4 57. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.7 124.1 167.2 50.7 95.3 1989 114.4 27.5 112.2 45.0 115.9 108.7 30. using a weighted (by provincial gasoline demand) 10 city average.1 105.4 110.1 26.1 117.1 120.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.3 139.6 51.2 109.4 97.2 112.0 32.1 97.3 58.1 48.4 29.1 103.7 29.0 97.5 145.4 152. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.0 1991 126.3 52.1 146.3 1992 128.5 94.3 122.3 141.4 34.6 107.1 151.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.9 1995 133.8 47.9 1993 130.2 121.0 111.4 45.8 1987 104.8 95.4 122.6 133.8 28.6 91. Nominal (¢/litre) (2) RUL Ex-tax Price.2 49.8 93.3 40.0 102.7 118.4 104.9 115.3 19.1 40.3 119.3 151.1 120.1 104.2 133. 62-010: Consumer Prices and Price Indexes.3 125.6 136.2 92.0 93. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.7 96.9 155.6 92.7 122.5 30.3 115.0 42.0 135.9 26.7 123.3 132.1 117.7 22.1 104.9 118.7 132.5 25.2 45.7 54.6 122.3 160.3 55.4 53.0 104.0 93.1 144. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.8 132.5 49.8 135.3 96.8 106.5 124. Nominal (¢/litre) (2) RUL Annual Price.4 104.1 87.4 136.2 142.1 115.4 120. No.0 19.8 108.9 26.9 122.3 27.2 30.5 126.8 130.0 1988 108.0 30.3 134.4 134.8 104.2 39.5 100.8 94.5 111.2 31.9 1994 130.2 20.2 127. MJ ERVIN & ASSOCIATES 85 .

9 7.5 23.9 23.2 25.4 21.1 9.2 4.2 27.4 12.9 4.5 26.2 21.3 24.5 30.9 53.3 57.5 11.4 14.9 26.0 20.2 41.9 25.6 54.8 28.3 56.2 7.8 16.1 22.1 5.4 26.4 24.9 23.4 14.1 7.4 24.9 9.0 24.4 57.6 9.8 26.6 5.2 24.7 19.4 22.9 15.5 7.9 12.9 25.8 30.0 26.8 14.3 54.9 6.5 35.9 24.0 24.2 5.2 63.3 Tax Content 23.7 12.4 30.5 16.0 13.0 25.6 54.9 26.9 11.6 23.2 6.7 18.7 4.5 Gross Marketing Margin Gross Refiner Margin 53.2 56.3 22.3 56.0 28.8 57.3 6.0 33.5 25.7 7.7 63.0 16.3 5.6 13.3 4.3 66.5 23.9 25.0 16.9 22.1 16.8 14.4 53.8 11.2 13.9 55.4 20.5 19.2 13.1 25.0 16.2 7.6 7.4 13.9 23.1 13.2 23.5 56.0 9.5 23.1 17.7 7.4 8.7 Downstream Margin 14.4 55.3 14.7 4.9 4.6 26.7 14.2 7.9 55.9 7.4 26.0 24.0 16.6 26.8 33.8 14.3 58.8 53.0 15.7 8.7 14.5 5.8 55.2 26.1 16.3 13.7 39.5 6.7 31.0 5.0 26.2 29.3 13.1 53.3 17.1 23.4 14.9 31.2 25.6 26.2 15.Table B: Key Price / Margin History .7 33.9 17.5 31.7 28.7 4.9 14.5 15.7 14.3 13.0 55.9 6.7 15.4 9.2 11.0 8.3 6.9 53.4 58.0 26.1 13.5 10.7 13.9 56.5 14.0 7.3 13.9 25.5 32.3 26.5 26.2 6.1 53.4 34.4 15.6 18.8 14.0 24.7 29.8 53.7 25.1 16.8 22.6 52.1 52.8 24.2 7.2 26.3 15.5 8.3 26.3 22.1 29.2 8.9 21.7 19.8 13.5 10.4 31.3 42.8 23.7 23.5 33.2 13.1 24.3 54.8 15.3 54.6 54.2 14.0 10.7 34.2 13.9 8.1 16.0 24.2 22.8 23.3 13.1 13.2 16.7 24.0 7.5 54.9 14.8 26.9 56.0 54.7 7.4 56.2 23.1 39.2 16.5 28.4 MJ ERVIN & ASSOCIATES 86 .1 7.9 58.7 58.6 6.0 4.8 8.2 12.4 31.0 14.3 15.7 29.6 23.1 18.0 22.0 25.9 54.6 8.2 14.0 52.3 9.3 23.4 32.8 25.2 27.1 23.5 57.2 27.3 12.6 24.5 22.6 28.7 18.9 13.9 25.6 21.7 14.9 7.4 13.4 14.7 29.8 8.0 12.1 21.1 22.3 25.7 6.4 29.8 29.4 33.0 24.8 21.4 26.6 20.9 6.8 21.8 9.7 32.5 27.2 65.5 7.6 13.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.1 18.5 27.1 19.0 7.9 30.6 25.7 14.8 55.1 23.6 4.5 14.0 24.6 25.4 7.

0 54.5 21.0 28.2 9.5 13.5 54.4 26.8 27.0 11.6 12.9 14.7 7.5 15.2 49.5 5.5 3.0 12.0 26.4 25.1 61.1 15.7 6.2 25.9 19.7 23.9 29.3 54.8 49.7 53.2 7.7 25.9 29.5 2.9 14.8 22.0 25.6 53.2 7.2 7.7 13.3 4.4 15.2 26.5 7.4 26.3 55.1 11.3 12.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .4 6.5 55.6 17.3 25.6 21.1 24.5 4.9 28.1 Tax Content 26.1 26.0 27.3 26.4 25.9 23.3 26.0 57.6 27.8 4.1 26.3 28.3 26.1 11.0 9.9 11.1 51.3 26.2 26.8 6.4 7.0 12.9 12.6 10.1 6.0 6.4 21.7 16.1 26.9 27.9 4.3 53.4 21.7 3.1 20.4 6.4 13.1 3.2 4.9 3.2 20.6 11.2 14.6 10.8 20.7 6.8 23.6 9.2 54.3 4.9 27.8 29.0 14.5 21.5 13.8 52.3 21.2 26.1 Gross Refiner Margin 7.6 20.0 6.5 11.0 25.0 52.7 26.2 7.7 5.1 51.9 49.3 9.6 5.8 28.4 6.9 49.6 16.1 21.3 26.2 15.2 14.9 17.5 25.1 10.2 27.0 28.3 4.8 17.0 28.1 6.0 5.7 29.4 26.5 20.4 28.0 28.5 14.5 6.7 5.6 53.8 25.9 5.5 6.0 5.1 16.5 11.3 28.7 3.2 12.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.7 13.5 5.0 26.1 14.0 53.3 23.4 32.6 19.1 15.3 6.3 27.5 21.4 24.2 11.4 11.3 9.1 54.0 6.7 25.6 4.6 3.4 51.9 26.9 6.7 53.5 23.9 Downstream Margin 12.1 14.5 3.1 11.7 8.3 13.5 17.1 57.2 25.7 51.1 15.4 4.3 9.6 15.9 58.9 4.7 24.3 26.0 29.3 26.5 6.5 19.2 23.0 9.1 6.7 7.7 14.4 6.3 7.5 19.3 8.5 7.3 7.7 52.2 14.8 23.5 9.8 50.0 24.7 12.7 15.1 11.7 14.5 53.1 55.3 21.6 4.7 26.9 12.3 26.1 6.0 28.2 28.7 24.7 18.9 9.6 20.0 14.2 20.2 Gross Marketing Margin 4.5 28.4 26.4 16.1 14.4 5.7 53.8 10.2 5.2 4.8 28.3 58.6 15.6 23.3 26.

831.1 23.651 2.301.890.242 2.580 3.035 2.179 3.4 25.378.684 2.869 2.1 21.283.191 2.002.326.299 2.4 31.457 2.5 23.6 23.285 2.8 23.8 28.441.709 2.970.193 3.572 2.671.622.8 29.0 28.101 2.029 2.188 3.3 26.642.564 2.781.160 3.4 32.2 24.2 23.130 3.2 29.5 32.636.933 3.930.313 2.409.688.844.020 2.785.182 3.315 2.429 2.462.180 3.015 3.262.131.5 25.Table C: Canadian Supply.827 3.8 27.733 2.710.516.193 3.633 2.450 2.813 2.209.621.5 30.051 3.3 23.235 3.810. Inventory.311 3.299.968 3.141.322 2.412 2.9 21.615 2.6 24.369.192.630.979 2.4 29.782 3.263.7 28.246 2.941 2.729.995.180 2.883.490 3.3 24.565.687.469 4.743 2.437.587.853 3.2 27.5 31.047 2.011 2.647.443 2.045 2.176 3.9 17.822.498.269 2.938.725.853 2.6 26.373.566.2 22.714.255 3.085.604 2.095.325 2.7 18.9 22.7 34.931 3.735.970.864 2.804 3.030.295.970 3.056 3.361.381 2.767.220.455.960.2 21.4 24.8 26.677 3.886 3.7 31.298 2.101.808.081.532.661 Canada Avg ex tax RUL pump price (¢/l) 39.5 22.422.521 2.7 21.206.1 23.998.201.430.641.322 3.0 20.4 24.181.3 23.612 3.475 2.168 2.2 27.502 2.558.904.667 2.270 3.268 2.748.281 2.089.2 26.693 3.370 2.799.9 26.287 2.894.1 16.932 2.354.022.2 27.479 2.732.458.301 2.801.558.045.045 2.7 24.637 3.7 24.4 21.291.130 3.973.897.9 31.437.779 2.1 22.151.083.839 2.152 2.625 2.599 2.619 2.075.322 2.871 2.141 3.609.477.709 2.113.661 Canadian Domestic Gasoline Sales (M3) 2.324 2.456 2.510 3.840.411.6 21.120.589 3.294.9 19.739.2 20.889 3.037 2.935 3.461 3.703 2.633.893.765 3.047 3.019.345.095 2.5 27.286.164.1 29.439.202 3.833 2.389.256 2.4 21.600.654.767.338 3.744.876.281.070.508.636.798.377.251.473.859 2.669.122 2.254.4 22.122.897 2.544 3.323 3.8 22.287.161.900.752 2.9 23.335 2.8 MJ ERVIN & ASSOCIATES 88 .476.9 26.930 3.180.073 2.415 2.716.044 2.682.518.837.673 2.3 22.279 2.628 3.132.254 2.176 2.874 3.329 3.6 28.802 2.026 2.7 26.682 3.331 2.416 2.333.321.796.3 22.141.830.301.1 23.3 Canada Avg RUL Rack Price (¢/l) 35.672.880 Canadian Retail Gasoline Sales (M3) 2.5 27.114 3.480.804 2.379.025.003.7 29.027 2.592 2.748 2.499 2.346.952.102.976.067.202.773.5 19.366 2.878 2.133 3.823.070 3. Demand.897 3.429 2.218.967 2.142.627 2.969 2.841 2.5 28.254.427.509 3.666.626.9 30.297 2.843. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.8 33.7 29.097 2.646 2.934.620 3.112 2.403 2.2 27.369 2.8 30.287 2.853.2 23.8 23.039.8 21.9 23.884 2.958.775.316.245.9 29.108.771 3.485 2.0 24.873.000 3.140.300.218 3.7 29.801.966.865.887.199 2.818.613 3.232 3.979 3.2 26.250.644 3.501.720 3.9 23.

904.5 21.863.606.593.7 22.294 3.521 2.806.315.426.785.0 25.2 25.679.930.919 2.881.324.055 2.516 3.130 3.889.414 3.5 source: Statistics Canada (production.871 3.0 25.415 2.198.264 2.830 3.940 2.195.182.244 3.9 27.483.082.198.382.703 3.8 25.566 3.4 20.184.8 20.660 3.097.155 2.5 25.970.649.112 3.644 3.8 21.864 2.717.338 2.773.048.617 2.442 2.984 3.977.165.005 2.796.7 Canada Avg RUL Rack Price (¢/l) 20.219 Canada Avg ex tax RUL pump price (¢/l) 27.170 3.669 2.519.675 2.0 26.214 2.0 26.5 21.336.555.658.390.692.344 3.205 2.148.324 2.936 3.179.198 2.671.0 24.597 2.649.906.965. demand.480 2.9 29.141 2.006 3.840 2.656 3.261.467 2.667 Canadian Domestic Gasoline Sales (M3) 3.999 3.8 28.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.997 2.2 25.928 3.9 22.1 24.753 3.346 2.1 21.317 2.620.614.170 Canadian Retail Gasoline Sales (M3) 2.857.607.077.537.4 26.6 20.204.386 3.2 26.4 26.994 3.074.961.222 2.264 2.469.6 20.505 2.149.7 21.986.363.4 25.601 3.8 24.648 3.320 3.037 3.386 3.376.7 19.791 3.370.250.797.799 2.068.825.638 2.539.714 2.123. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .

2 56.8 47.5 59.6 62.9 57.0 61.4 57.6 55.4 57.3 55.2 59.7 44.1 49.4 52.8 55.5 Vancouver 53.8 53.0 61.5 59.4 50.8 48.2 55.3 62.5 55.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.7 45.8 54.9 55.7 54.7 48.0 61.9 58.7 65.5 58.6 46.0 52.8 57.4 52.9 61.9 57.4 56.0 59.4 56.8 59.5 56.2 Nanton Peace River Regina 49.9 61.1 50.9 56.3 51.5 57.0 62.7 57.9 53.6 50.8 56.9 55.0 59.9 61.8 56.7 65.4 48.4 53.2 47.9 51.9 50.9 64.2 62.9 58.4 55.5 57.5 59.9 47.9 58.7 46.5 52.9 53.9 54.9 56.4 54.6 52.0 61.2 63.3 52.5 57.9 56.5 53.9 56.3 50.9 61.9 52.7 51.9 53.9 49.0 52.1 53.9 56.8 64.0 54.8 52.5 58.4 49.9 49.6 53.9 54.6 56.7 49.4 56.9 44.4 58.9 53.4 53.9 53.5 58.0 50.7 62.9 61.1 43.9 54.9 54.5 55.5 57.8 48.9 47.5 59.5 58.0 61.8 52.5 47.5 59.5 51.7 48.2 54.9 55.2 61.9 54.1 55.9 53.6 48.5 58.6 47.9 52.9 59.8 47.4 52.3 50.7 50.3 61.8 48.9 56.4 56.9 52.5 46.7 51.9 63.3 52.3 54.2 51.9 44.5 59.3 48.3 52.9 64.7 51.5 61.8 45.6 59.6 49.4 55.5 58.6 54.2 50.8 56.5 59.0 57.2 58.6 54.9 53.7 62.5 54.4 47.2 57.9 53.5 45.2 62.3 54.2 50.9 58.9 52.9 54.1 44.2 51.8 52.8 52.8 41.9 46.9 52.8 48.2 62.5 52.2 62.0 44.9 61.1 44.0 Sioux Lookout 62.7 White Rock Calgary 45.2 48.5 56.9 56.5 58.5 58.5 60.2 62.6 47.4 52.6 47.9 55.8 50.5 61.7 63.9 64.1 52.7 53.1 53.5 57.8 53.9 64.6 50.6 44.8 44.7 53.5 56.5 47.7 54.4 46.5 53.8 57.4 63.3 55.9 48.9 51.4 Winnipeg 49.9 53.2 62.4 61.1 60.8 53.7 52.9 56.7 45.0 62.5 57.9 54.9 47.5 59.4 54.3 48.5 60.5 51.4 55.5 51.8 Thompson 59.5 57.8 59.9 45.5 58.0 61.5 57.5 51.8 52.9 56.6 53.4 65.5 62.9 62.7 65.4 61.1 50.2 46.7 65.6 46.4 55.9 47.1 49.7 65.9 51.9 62.1 55.2 62.8 53.5 57.9 52.6 48.2 54.9 51.4 52.4 46.4 61.9 53.0 61.5 60.5 58.1 41.0 62.5 49.5 58.5 56.9 64.5 57.5 50.4 53.0 48.4 46.5 54.9 54.8 56.1 49.5 53.5 60.5 57.4 56.5 47.1 59.2 50.3 56.0 55.7 53.3 52.8 49.Table D: Pump Price History .5 57.8 56.8 50.2 62.6 55.9 58.4 55.7 57.8 51.0 39.5 45.5 51.2 54.0 46.9 52.4 55.9 56.4 59.5 60.9 53.5 59.3 49.2 65.4 54.6 48.9 49.7 54.2 65.6 58.9 56.3 42.1 52.2 62.2 46.8 56.5 58.6 58.0 58.3 52.2 43.5 60.5 56.1 56.2 46.4 56.1 55.7 50.3 49.7 52.2 51.9 MJ ERVIN & ASSOCIATES 90 .5 57.9 59.6 51.3 59.4 58.

3 59.6 56.9 63.0 61.7 54.6 52.3 51.5 59.7 59.0 51.4 57.9 53.0 50.2 51.9 51.3 53.5 56.2 49.5 55.0 57.9 61.0 59.2 52.2 49.1 55.5 53.3 56.0 55.3 54.5 56.4 52.8 60.7 44.1 54.4 54.7 56.0 54.2 60.7 64.4 57.3 54.2 57.4 45.1 56.9 56.9 55.6 56.6 58.1 49.9 55.1 Toronto 52.3 56.6 Canada Avg 55.0 55.9 57.2 57.5 56.5 54.5 MJ ERVIN & ASSOCIATES 91 .9 50.6 59.0 54.6 49.6 56.2 55.Table D: Pump Price History .0 59.0 56.9 53.8 49.7 51.7 52.1 61.6 55.1 58.3 61.7 48.0 54.8 52.9 55.1 55.4 58.7 49.7 56.2 57.2 56.6 63.4 54.6 58.5 52.0 55.6 54.2 56.7 54.4 53.5 64.3 54.3 59.1 53.6 55.8 55.3 53.6 54.3 49.4 53.0 55.7 56.5 51.6 53.6 50.5 56.0 60.2 57.8 54.7 50.3 56.0 61.9 56.2 53.0 52.7 54.5 57.3 60.4 51.8 56.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.1 59.0 56.6 54.5 61.7 53.3 55.9 49.8 61.7 56.6 53.9 61.6 54.1 58.0 47.0 52.6 61.9 55.6 53.9 53.5 51.8 54.1 48.5 51.3 57.2 61.9 60.6 52.6 52.9 61.0 57.2 59.3 52.6 55.1 55.2 55.5 52.0 52.9 55.2 52.2 49.8 57.0 53.3 52.4 52.6 59.1 58.2 61.5 57.1 53.6 55.3 54.1 51.7 51.4 58.2 53.2 49.2 56.5 60.5 Ottawa 58.9 57.6 59.0 50.7 59.7 54.4 54.9 61.0 55.0 60.5 67.8 55.0 52.5 63.3 53.7 51.8 55.9 57.8 53.3 52.8 55.7 53.2 58.2 57.5 57.6 55.9 56.7 57.5 54.1 56.1 52.2 53.7 52.4 54.1 53.0 49.5 54.9 56.8 55.6 52.8 63.8 50.8 54.7 48.4 54.5 59.3 55.2 59.6 55.1 57.5 63.3 53.9 55.1 59.7 57.4 53.0 47.6 63.4 58.4 51.8 51.1 54.3 54.0 53.0 48.1 52.4 57.2 55.9 55.0 60.6 60.1 57.8 56.9 64.8 Halifax Charlottetown 60.0 48.1 51.0 52.6 52.4 55.7 57.1 53.1 55.7 56.5 51.0 50.7 54.4 54.6 50.5 54.2 57.1 54.3 54.6 58.2 51.9 57.2 56.8 54.5 63.5 48.5 53.1 54.6 61.8 61.0 52.2 58.2 57.9 55.5 54.3 56.3 54.0 55.1 57.5 61.3 54.7 51.8 52.5 54.5 57.2 57.3 59.2 57.4 53.9 55.9 60.2 57.6 51.8 53.5 54.5 52.6 54.2 54.8 55.9 49.7 46.8 53.3 55.6 52.9 55.2 55.3 55.9 49.5 52.5 55.9 49.9 62.9 54.2 54.2 56.9 58.3 54.9 58.8 60.5 56.6 54.6 53.9 52.2 60.1 51.3 58.4 57.1 60.2 54.2 55.3 49.2 61.1 55.4 49.6 56.8 49.6 63.4 58.1 58.6 57.2 Chicoutimi Gaspé Saint John 60.5 61.8 57.9 61.3 53.7 55.4 54.8 55.7 58.8 55.2 51.2 52.1 52.2 54.3 55.2 58.1 54.5 64.8 50.4 58.0 57.4 58.0 58.3 62.1 60.8 50.9 54.1 56.3 59.2 56.0 57.0 51.0 53.0 56.5 55.2 50.3 56.4 60.7 54.2 54.2 56.3 55.6 55.5 53.8 57.1 54.9 64.9 54.7 52.6 51.5 59.4 57.4 57.7 57.9 64.6 51.7 58.2 Montreal 63.9 53.5 60.1 61.2 56.6 58.6 54.4 55.8 47.1 55.0 60.6 49.5 53.9 53.4 51.3 52.7 47.9 60.4 50.7 56.8 59.7 57.6 52.7 60.2 55.6 50.0 59.5 57.1 53.5 58.1 61.6 58.4 54.0 54.

3 26.3 29.3 29.6 25.8 22.1 25.7 28.0 27.4 MJ ERVIN & ASSOCIATES 92 .6 25.4 27.1 24.4 22.4 25.0 24.7 28.4 27.9 25.1 25.7 29.5 27.9 30.0 21.6 27.7 30.3 May-94 28.6 23.8 27.8 Jan-94 25.4 27.2 Jun-94 31.3 29.5 Nov-95 30.8 Toronto extax 26.2 26.8 26.7 Sep-94 32.7 26.4 29.6 26.1 28.3 23.5 29.1 27.4 22.9 26.9 27.7 30.4 31.5 26.4 29.5 27.6 29.9 Aug-93 30.5 23.9 28.1 23.7 24.2 Nov-93 27.1 Feb-93 29.9 25.9 Jul-93 28.1 26.5 Sep-92 29.2 27.1 30.2 28.9 23.5 Jul-94 29.4 31.9 28.8 27.2 22.4 27.3 28.7 27.4 24.0 23.8 29.5 21.3 27.3 32.8 25.4 31.4 22.3 Feb-95 26.4 31.3 26.6 22.1 24.3 28.2 28.9 27.3 29.6 26.6 27.8 31.6 26.8 27.3 24.6 28.1 22.1 28.0 23.6 23.3 30.7 29.3 28.9 31.4 28.6 May-95 29.7 25.9 21.4 30.3 24.5 Feb-92 28.5 Oct-95 30.9 26.5 29.6 26.3 21.9 20.0 May-93 29.7 24.8 24.4 23.4 Dec-92 31.6 23.4 20.3 29.7 26.2 24.3 28.3 30.8 Dec-93 26.5 24.7 28.7 29.8 29.8 26.2 24.9 30.8 24.7 26.0 25.3 24.0 31.9 27.4 28.6 29.5 Jul-95 30.8 27.9 25.9 24.4 29.3 29.8 26.5 27.4 23.4 Mar-92 28.5 29.7 30.2 25.6 Aug-95 30.7 30.8 27.9 24.3 33.9 25.2 Dec-94 26.9 Oct-94 32.4 29.5 27.3 26.6 23.6 26.9 24.3 26.6 21.8 28.1 25.7 26.4 25.0 24.5 28.3 27.0 25.2 29.1 27.4 25.2 Apr-93 28.2 27.1 20.9 29.2 26.Table E: Ex-tax Pump Price History .8 Feb-94 24.4 28.5 21.8 29.4 25.0 26.8 26.9 26.0 24.6 26.9 23.2 Nov-94 29.0 26.1 24.9 27.3 29.5 26.2 29.1 Apr-95 30.7 Aug-92 24.0 Apr-92 30.7 Jan-92 31.5 Oct-92 30.3 30.1 22.7 30.7 28.6 Sep-93 28.9 21.4 Jun-95 30.0 23.0 29.6 22.2 23.9 26.0 27.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.8 25.8 24.8 29.7 27.8 28.0 May-92 28.7 28.6 26.7 31.9 28.0 Jun-93 26.3 28.6 30.5 24.7 Jan-95 27.1 19.9 29.1 31.8 28.6 Mar-93 28.4 29.5 24.3 31.7 28.2 24.2 28.8 23.4 27.4 20.2 26.3 29.3 Jul-92 31.0 31.5 25.4 24.4 26.3 29.9 24.3 23.0 26.8 25.9 28.6 29.2 32.4 29.6 30.0 28.6 28.6 24.2 Nov-92 31.1 Mar-95 29.4 31.7 Mar-94 28.5 Aug-94 28.4 29.5 23.6 27.1 31.5 29.9 24.4 30.9 30.4 30.0 23.3 30.6 30.2 26.6 29.8 21.4 30.4 21.7 Sep-95 30.4 25.5 27.4 31.2 28.4 31.5 29.3 26.1 25.6 24.3 Jan-93 30.0 22.0 32.3 29.1 30.2 25.6 26.3 Dec-95 Edmonton Regina extax extax 27.0 Oct-93 28.2 24.8 24.6 Jun-92 32.4 20.9 29.1 Apr-94 29.0 23.0 25.6 27.4 23.7 Winnipeg extax 27.8 27.9 25.7 29.1 26.

0 33.5 25.9 29.9 27.0 25.8 26.7 28.1 34.9 28.2 25.1 28.7 26.8 28.8 27.4 25.8 25.4 21.2 25.6 31.9 33.2 32.6 28.4 26.9 29.4 33.7 30.5 25.1 24.5 31.6 33.6 28.3 29.7 27.7 23.2 23.3 33.7 24.9 27.5 27.8 29.0 29.9 32.8 25.6 25.5 27.6 32.8 26.8 30.5 33.9 30.2 28.7 26.2 Saint John Halifax extax extax 34.8 26.8 32.7 33.9 32.0 33.2 24.1 34.2 22.6 33.7 24.6 32.7 34.1 29.7 26.5 27.2 22.0 29.8 32.1 32.4 25.4 34.4 26.0 30.1 32.8 30.1 29.6 28.8 32.7 27.5 34.3 26.2 27.5 30.0 33.6 25.1 26.2 27.3 25.1 26.7 29.6 32.8 28.0 26.2 24.6 36.3 34.5 28.1 25.1 23.3 34.0 29.7 30.8 27.0 28.4 36.2 27.6 26.6 27.8 29.7 28.4 32.5 30.2 25.Table E: Ex-tax Pump Price History .3 29.2 29.8 25.1 32.4 31.0 26.3 31.0 34.6 26.2 30.6 23.8 23.6 28.7 28.8 28.8 23.3 27.0 34.9 29.4 24.0 28.2 27.4 36.3 29.9 27.9 27.5 31.0 27.7 22.9 26.2 27.5 30.7 27.5 29.6 34.2 27.6 29.2 26.3 25.5 26.7 27.0 36.3 34.3 31.5 28.1 29.9 32.9 29.7 Quebec extax 32.5 25.5 28.7 24.6 Charlottetown extax 36.3 35.3 24.6 26.9 37.1 Montreal extax 31.7 28.0 32.0 25.7 32.3 28.3 23.1 28.3 25.7 24.8 23.2 22.1 34.2 26.6 29.8 27.9 26.1 30.2 30.3 31.7 32.3 29.9 27.8 36.4 26.8 23.0 25.2 28.1 24.1 30.6 26.9 24.7 34.0 32.8 30.2 28.9 33.1 30.8 24.2 30.4 33.2 26.5 25.8 Canada Avg extax 29.4 28.4 33.3 28.2 32.9 30.2 36.1 24.9 31.4 27.1 32.9 29.4 22.0 31.8 33.5 28.3 31.9 28.6 32.9 29.1 22.2 21.7 28.6 36.4 28.3 30.4 31.8 29.2 22.1 24.7 24.7 26.9 31.2 27.5 32.9 30.2 26.3 29.6 27.3 27.4 25.7 23.0 28.5 36.0 23.9 30.5 27.3 28.1 31.4 24.3 28.9 30.3 25.8 28.2 32.2 33.0 36.7 26.9 35.6 23.8 26.6 24.9 29.5 24.2 36.0 26.4 25.3 26.8 33.8 25.0 28.5 26.5 33.5 25.3 22.3 31.2 34.5 24.3 26.7 26.2 27.2 33.6 22.0 30.6 31.2 26.7 25.9 32.4 33.0 28.8 26.5 25.3 28.8 28.0 33.8 27.7 32.8 28.6 28.7 29.7 MJ ERVIN & ASSOCIATES 93 .4 33.2 25.5 33.0 34.0 33.8 29.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.4 32.4 32.0 23.7 23.9 26.8 32.9 23.4 31.6 27.6 34.6 32.2 27.8 29.

1 21.1 15.8 23.9 24.8 20.9 22.2 29.1 22.6 23.2 17.7 17.6 25.9 18.5 19.2 21.0 20.7 21.4 21.9 22.3 21.9 21.7 17.4 21.7 16.3 23.4 22.6 20.6 19.5 20.0 23.5 22.4 18.2 18.3 17.8 21.1 23.6 23.2 23.7 22.9 21.4 21.7 21.5 17.4 22.1 16.4 21.1 21.1 19.2 21.7 23.7 21.4 22.0 21.4 21.7 22.6 19.9 23.1 24.9 18.3 20.2 16.7 22.4 20.9 22.5 23.5 21.0 21.9 17.4 23.6 19.3 23.9 20.1 20.3 17.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.1 22.2 22.0 21.7 22.8 20.5 18.0 23.8 20.9 18.9 19.2 21.7 19.5 24.0 21.4 15.0 20.2 18.3 22.5 21.4 23.2 18.1 20.2 19.5 22.0 23.6 20.2 22.7 18.1 23.3 23.3 19.5 22.0 24.5 22.6 25.1 18.3 21.5 26.3 22.7 20.8 20.5 24.1 22.8 21.4 21.9 20.2 18.5 17.4 23.2 18.4 21.3 19.2 16.2 22.3 20.6 23.5 17.4 20.3 24.4 20.4 21.6 20.1 21.8 Ottawa rack Thunder Bay rack 20.8 24.1 19.2 20.2 16.6 21.7 22.8 19.0 23.5 27.3 19.6 19.7 21.6 23.9 22.1 20.7 21.3 20.4 22.6 20.8 21.6 25.9 21.8 25.6 21.9 21.8 19.5 22.7 22.1 15.2 21.1 21.1 20.4 22.1 22.8 21.3 23.8 18.2 23.8 18.8 18.7 20.4 22.1 22.4 21.7 21.0 21.3 22.4 24.1 23.3 26.4 17.6 23.9 22.5 22.8 22.8 18.0 23.1 22.4 22.7 MJ ERVIN & ASSOCIATES 94 .1 21.2 20.3 23.9 22.5 20.3 21.2 21.3 17.5 18.4 21.5 21.4 22.1 Halifax rack 20.5 21.8 22.2 20.5 23.1 19.8 23.0 22.9 20.4 20.5 20.3 21.7 23.4 21.6 19.1 20.2 21.7 18.0 21.9 21.3 18.3 18.0 22.5 19.6 23.0 19.Table F: Rack Prices .9 22.5 24.2 19.2 19.4 19.8 21.1 20.2 23.5 20.5 21.9 25.8 21.8 20.6 20.0 23.8 23.3 19.3 18.5 21.1 21.0 23.8 23.8 27.0 22.6 22.2 20.7 22.3 23.8 22.8 23.8 23.6 20.6 19.8 23.7 17.4 22.0 19.8 22.9 18.1 22.3 24.9 21.0 19.3 23.6 20.3 20.4 22.8 19.4 22.2 21.8 22.1 20.0 23.8 20.0 22.0 22.7 20.7 21.5 21.1 21.6 18.2 20.2 21.0 22.2 Quebec city Montreal rack Toronto rack rack 19.4 23.2 23.3 22.0 21.9 23.2 20.3 21.7 19.4 20.5 21.4 21.4 21.5 23.7 22.8 19.1 20.1 21.7 22.

7 22.0 24.3 24.3 22.8 Vancouver Victoria rack rack 24.3 19.4 20.1 24.0 21.4 23.0 22.7 24.3 21.7 22.4 23.6 21.2 24.4 24.7 23.4 24.2 21.1 22.3 22.3 24.3 21.5 19.0 20.3 17.1 23.7 20.9 22.6 21.2 24.9 21.2 21.9 23.1 22.4 22.6 20.6 23.7 22.8 24.0 18.2 18.6 21.9 23.4 24.5 22.0 21.5 22.5 20.7 21.8 24.2 22.6 23.2 23.2 24.7 24.3 24.7 21.1 16.4 24.9 21.4 21.0 21.5 23.1 25.1 21.7 23.4 21.3 20.9 23.2 24.5 19.4 21.5 24.0 22.9 19.7 19.1 21.9 21.8 23.2 22.2 23.9 19.9 22.4 23.3 18.2 22.5 Canada avg rack 22.2 19.0 18.0 22.0 24.9 24.6 17.0 22.6 22.5 23.4 19.5 23.7 21.4 25.7 22.1 25.0 17.2 19.6 21.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.3 23.4 18.1 23.4 21.0 24.6 23.9 21.9 23.7 24.7 21.5 18.0 25.6 21.7 25.4 21.6 20.6 19.1 21.0 21.6 25.0 20.6 22.9 20.5 18.0 23.5 22.7 23.5 21.1 21.9 19.5 23.6 21.8 22.9 22.2 20.9 21.0 23.4 22.7 21.7 23.3 17.5 23.5 20.9 21.6 23.6 24.9 22.2 24.0 22.0 22.1 25.5 23.5 20.5 21.0 17.0 24.7 22.1 23.8 23.4 21.1 19.5 21.1 16.2 23.9 22.1 23.9 22.9 22.5 22.6 21.6 24.5 21.0 20.8 22.1 21.9 21.1 21.1 20.8 18.5 21.9 19.5 21.3 20.5 24.1 23.5 17.3 20.8 20.9 19.1 23.2 20.5 22.9 24.5 MJ ERVIN & ASSOCIATES 95 .3 23.0 23.8 19.7 21.3 17.8 20.2 20.1 18.6 22.5 20.9 20.1 21.1 22.8 21.8 21.8 23.8 21.5 21.0 22.4 20.7 22.8 25.1 23.5 21.8 22.3 22.7 21.7 21.7 23.6 20.8 24.2 21.9 23.9 18.1 19.6 21.3 20.7 21.2 23.1 22.1 18.9 24.7 17.3 22.8 20.9 22.6 22.5 23.6 23.7 22.6 23.3 21.3 19.3 23.2 21.3 23.3 23.9 23.4 22.6 17.4 21.1 23.8 22.1 17.9 21.2 20.6 21.4 22.6 20.7 22.1 23.8 21.7 21.5 19.3 23.5 22.3 23.3 24.8 23.2 Edmonton Rack 23.6 25.5 24.1 20.1 22.6 25.9 17.6 19.9 20.7 21.2 21.1 23.8 22.Table F: Rack Prices .0 23.2 23.9 19.2 22.8 20.5 24.0 21.7 21.4 22.6 23.4 19.2 20.2 22.0 22.7 25.1 21.9 21.7 17.4 21.5 21.9 22.0 20.8 20.2 22.1 22.0 23.7 22.7 22.4 23.5 19.6 23.2 22.6 21.9 19.2 23.3 21.7 18.2 22.9 18.8 22.1 20.5 21.

35 73.113 2.749 91.014 3.643 184.40 59.529 123.97 51.770 2.86 56.971 473.60 70.749 243.093.80 64.796 529.17 Diesel 64.678.686 273.377 30.89 65.214 248.211 15.53 48.448.935 758.850 126.10 63.40 54.00 48.150 48.22 59.83 68.671 399.636.687 1.88 54.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.28 65.204.50 56.249.45 53.89 61.00 57. and All Study Markets are weighted (by market population) averages.53 61.597 2.66 50.985 636.26 63.145.50 56.712 1.000 63.238 2.26 44.26 49.24 61.23 63. MJ ERVIN & ASSOCIATES 96 .897 350.65 54.460 833.97 63.70 49.60 49.20 60.698 Note: Regional.20 61.94 55.98 59. Urban.246 2.10 52.34 63.30 57.25 57.38 56.18 51.554 2.Table G: Study Market Data .40 63.153 316.334.78 67.101 447.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.620.192 2.438 591.40 61.058 2.905 183.00 66.628 702.412 722.945.72 74.42 53.414 450.55 58.483 2.234 799.00 57.13 58.980 120.89 60.101 256.370 41.02 51.45 63.03 58.983 1.832 91.90 67.196 669.508 2.174.300 578.933 25.298 576.194.009 54.859 240.88 64.056.018 2.48 56.119 632.20 59.625 64.972 429.895 600.60 60.745.74 57.614 3.50 55.30 66.516.87 61.90 63.830 2.018.702 333.500 378.220 389.92 51.837 329.85 48.30 54.296 179.704.621 102.23 53.811 120.70 55.73 65.250 748.40 58.890 2.997 397.19 49.16 59.72 63.07 61.790 185.10 59.19 52.120 570.475 1.166 102.30 54.796 2.858.245 351.141.173 568.400 142.102 98.922 103.85 54.241 451.72 58.030.557.483 63.060.052 84.00 67.36 54.10 53.543 2.60 50.513 19.268 478.00 62.93 63.20 54.11 58.30 52.30 68.669 203.000 1.949 1.702.90 62.894 1.834 71.420.332 101.903 33.549 111.30 63.32 51.000 1.20 58.000 217.810.

45 20.26 28.97 25.36 26.45 20.89 26.43 20.21 27.02 23.34 20.83 25.27 20.87 26.83 24.04 26.18 25.98 25.40 25.50 25.01 22.38 24.07 26.91 21.42 25.88 22.27 29.33 21.35 25.07 24.90 27.06 28.56 22.25 27.82 21.41 27.74 21.43 21.95 25.63 24.43 21.51 20.33 22.45 22.Table H: Study Market Data .07 26.28 22.95 22.09 27.01 28.50 20.32 21.96 24.88 20.33 21.83 24.73 32.34 25.16 21.15 24.16 29.49 21.88 20.39 22.11 26.32 33.20 20.45 29.45 29.55 28.15 29.57 22.25 31.76 24.49 25.09 24.39 Note: Regional.59 22.88 28.23 25.97 22.63 25.63 28.58 25.37 27.93 23.43 28.89 25.88 28.47 27.69 23.65 21.28 23.43 20.49 31.92 22.98 28.59 28.82 28.45 25.59 24.97 23.68 Diesel 36.63 20.54 28.84 28.63 26.33 21.75 27.89 28.83 22.25 28.93 23.20 27.49 21.16 22.08 25.07 24.42 24.33 21.13 23.45 20.17 20.99 28.15 20.51 31.84 28.45 20.03 20.94 23.42 24.47 20.64 28.81 28. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.25 24. Urban.73 26. MJ ERVIN & ASSOCIATES 97 .63 21.88 22.96 22.38 24.23 24.03 24.53 23.95 Premium 26.26 27.83 24.07 24.Rack Price.92 30.85 28.99 26.23 26.48 25.03 21.30 29.69 27.55 28.51 25.18 28.59 28.33 27.39 21.31 22.45 24.89 29.57 29.92 21. Tax (by Grade) Rack Pt.75 22.15 27.33 22.81 25.45 24.33 21.47 28.40 27.65 27.76 25.42 27.36 24.08 23.39 22.93 27.96 24.90 26.39 21.21 27.45 28.34 26.95 22.33 22.59 28.81 21.78 Product taxes Midgrade Regular 26.65 26.04 24.83 23.92 20.23 23.51 25.45 23. and All Study Markets are weighted (by market population) averages.41 22.81 27.59 22.

82 32.94 17.49 57.56 4.35 28.51 11.13 11.75 28.24 23.033 0.10 3. Variance uses the formula [n∑x2 .03 7.82 3.71 33.31 0.18 21.70 22.00 4.24 7.63 60.49 2.81 28.29 8.07 30.75 23.91 0.38 2.98 0.89 0.13 28.50 10.30 12. Average Deviation is the average deviation of the market values from their mean (average) value.54 50.88 5.36 20.64 3.16 20.29 7.08 55.26 27.86 28.31 28.12 6.37 26.14 7.59 4.44 56.58 66.42 2.28 1.94 22.73 1.50 0.58 1.17 26.27 60.76 5.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.96 25.60 7.25 1.36 0.05 6.98 1.85 24.81 26.53 21.00 58.35 60. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.94 Note: Regional.96 27.45 6.79 0.27 6.38 0.78 2.56 24.68 7.91 29.93 22.96 3.32 31.Blended Prices.80 9.82 95 Retail Gross Product Margin 6.72 26.95 6.38 7.01 0.21 24.98 0.02 13.27 62.00 0.83 21.21 8.50 3.31 34.85 21.73 10.22 5.77 37.18 55.18 7.83 12.22 14.07 0.88 31.02 3.53 6. MJ ERVIN & ASSOCIATES 98 .Table J: Study Market Data .47 58.44 25.83 36.47 0.43 0.30 5.15 66.44 33.21 8.99 2.(∑x)2 ]/n2.64 3.96 28.50 58.06 5.19 5.45 1.41 29.01 31.63 58.89 28.90 23.84 28.00 22.12 23.11 31.73 2.22 1.64 1.64 2.20 5.34 0. and All Study Markets are weighted (by market population) averages.26 3.04 22.35 58.33 9.57 12.06 0.68 2.27 11.23 38.28 27.79 33.86 49.60 23.85 26.31 23.04 0.08 3.85 11.13 0.89 21.38 28.16 54.53 22.92 22.99 0.26 5.83 27.90 59.91 2.95 21.14 60.60 14.83 1.24 7.66 28.93 56.48 7.02 22.77 30.38 22.33 .17 9.97 0.06 28.28 1. Costs.62 56. Urban.11 26.52 30.91 22.73 22.77 5.35 27.41 7.10 6.17 1.39 56.20 14.08 17.04 23.80 1.52 5.28 56.41 12.16 3.98 31.03 28.07 0.02 0.17 11.29 24.23 7.84 5.04 28.43 23.68 7.08 0.34 1.

Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.272 $ 210. Urban.467 $ 96.023 $ (15.638 2.247 4.604.098 $ (320.557) $ 102.885. For 95 net retail petroleum revenue.135 $ 199.626 $ 81.694 3.058.837 $ 56.911) $ (166.217 2.129 $ 97.000 $ 156.956) $ 200.520 5.800 $ 225.223.465.719 3. but for ancillary revenue.302 $ 69.Table K: Study Market Data .779 $ 121.071.677 $ 180.244 95 net retail Ancillary Revenue petroleum revenue $ 208. outlet costs.646) $ (98.074 $ 131.716 Note: Regional.143) $ (249.564 $ 252.032 $ 77.089.632 $ 256.572) $ (286.827.209 $ 82.871) $ (128.375) $ (49. these averages are based on all applicable study markets.394.866) $ (244.000 2.081 $ 222.224 $ 189.272 $ 118.013 $ 227.993 $ 113.098.000) $ (241.890. and consolidated outlet income these averages are based only on those markets with available data.855 $ 278.630 3.117 $ 207.102 $ 223.011.010 1.263 $ 60.550 $ 177.688 $ 85.995 $ 234.948 3. Outlet Costs.966 3.250.481 $ 96.544 $ 175.542 $ 222.794 3.766) $ (274.095.772.208) $ (226.209 $ 26.478 4. Revenue. and All Study Markets are weighted (by market population) averages.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.367) $ (164.623 2.246 $ 118.279 $ 154.780 $ 85.066 3.014.157.648 3.429 $ 238.900 2.900 $ 179.875 $ 255.542.502 $ (80) $ 60.332) $ (238. MJ ERVIN & ASSOCIATES 99 .934 3.265.295 $ 174.746 $ (374.805.750 $ 271.289 981.622 $ 174.707 $ 260.004.510 $ 60.067 $ 92.Sales.526 $ 207.068 3.144 2.658.550 694.197.852) $ 119.120 $ 54.640 4.856 3.913 $ 139.241) $ (227.

41 0.68 4 7.550 1.45 0.870 120.745 16.73 14.60 11 7.970 330.08 4 2.098 4.28 17.48 7 7.071 2.73 5 10.604 3.98 7.465 694 3.23 8 31.790 1.88 12 7.17 19 9.40 9 4.89 7.85 15 11. N refers to study sample size (total = 481).223 3.53 10 6. of Outlets No.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.27 1.40 1 3.250 981 2.50 9.38 0.97 8.04 15 4.394 2.22 3.90 13 4.Demographic Profiles Population pop’n 299 .91 12.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.79 6.Table L: Study Market Data .658 3.21 0.06 16 4.54 6 2.089 3.08 16 3.265 2.51 9 11.52 13 5.47 14 3.84 12 5.20 0.50 8.585 6.775 678.095 3. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.845 15.23 6 7.98 6.13 2 11.95 3 9.47 7. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.96 5.08 3. inverse ranking is used (lowest value = 1).30 1. rank* 3.22 0.000 pop’n No.145 81.827 3.36 5.06 1 5.10 3.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.014 5.475 3.715 14.605 16.20 17 14.45 14.004 3.91 17 4.30 0.400 74. MJ ERVIN & ASSOCIATES 100 .542.310 1.180 616.43 12.02 0.55 19 11.01 7 2.06 5. of Brands No.29 8 7.058 1.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.315 710.89 2 4.27 0.80 10 4.50 3 10.33 0.975 2.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.88 11 8.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.42 5 14.24 0.00 11.675 179.157 2.275.775.29 1.60 3.76 18 5.41 1.

Ottawa ON. safety and business issues. The SCF is the basis for this study. cardlock. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . a series of studies whose goal is to strengthen Canada’s competitiveness.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices.14th Street NW Calgary AB. They work with major oil companies in benchmarking performance in the retail. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. bulk. 119 . Contact: Maureen Monaghan Address: 580 Booth Street. Petroleum Products Address: 235 Queen Street. Senior Advisor. aviation and lubricants marketing channels. accessible through a public fax-back dial-in system. Principal Address: #400. Ottawa ON. Contact: Michael J. and provide background resources to industry public affairs managers and the media. Ervin. Ottawa ON.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). generate jobs and growth. They maintain a large database of historical prices at most major centres. and in doing so. Contact: Cindy Christopher. health. Contact: Brendan Hawley. Vice President Public Affairs Address: 275 Slater Street.

Supervisor. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. Executive Director Address: 214. Ottawa ON. Contact: Robert Curran. Managing Editor Address: Suite 2450. 101 . 311 . Contact: Gerard O’Connor. and is a useful “window” on this industry.6th Ave. no 45-004) is a useful source of supply and demand volume data.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. SW Calgary. Calgary AB.6th Avenue. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Its monthly publication “Refined Petroleum Products” (cat. Energy Section Address: Statistics Canada. Contact: Len Bradley.ab.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Octane is published quarterly. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .Octane Magazine Octane is Canada’s refining and marketing trade journal.

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